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This paper evaluates the lifetime welfare and labor market consequences of experiencing a recession during youth, using a directed search equilibrium model with heterogeneous agents and aggregate shocks. In particular, the model allows for endogenous schooling decisions over the business cycles. The counterfactual analysis shows that experiencing the 1981-1982 recession in youth causes a 1.6% to 2.3% loss in lifetime welfare. Endogenizing the schooling decision avoids overestimation of welfare loss because of the selection effect and the human capital effect. I also decompose lifetime wage changes into different channels: changes from schooling, work experience, and job mobility. This article is protected by copyright. All rights reserved

Using National Longitudinal Survey of Youth 1997, we estimate the long-term impact of an early career recession on various health outcomes and health-related behaviors. The early career recession is measured by the state-specific unemployment rate in the year of labor market entry. Using an instrumental variable approach, we address the potential selection issues on the timing of labor market entry. We find that first, an early career recession has an adverse impact on health status, depression, smoking, heavy drinking, illicit drug use, exercise, and daily fruit intake; and second, these adverse effects are especially pronounced among lower educated individuals.

This paper evaluates the long-term welfare consequences from experiencing a recession as youths, taking into account the impact on schooling, future job mobility, human capital accumulation, labor supply and wages. The paper also explores the mechanisms that account for lifetime wage changes by decomposing those changes into different channels: changes from schooling, from work experience, and from job mobility. To achieve these goals, this paper develops and estimates a search equilibrium model with heterogeneous agents and aggregate shocks. The model is an extension of a directed search model, the Block Recursive Equilibrium framework of Menzio and Shi (2010), which remains tractable when it is solved outside of the steady state. The counterfactual analysis shows that experiencing the 1981-1982 recession at age 16-22 causes a 2.2% to 3.0% loss in lifetime welfare. Endogenizing schooling decision avoids overestimation of the welfare loss for two reasons: first, there exists the selection of labor market entry timing and high ability individuals are more likely to postpone entry into the labor market during a recession; second, the additional schooling caused by an early career recession increases future wages and employment rate. The wage decomposition shows that the loss from job mobility explains the majority of the wage loss during the recession, and the loss in experience and tenure persists long after the recession.