10 minute read 29 Jun 2020
Silver car on road

Driver or Passenger: how recessions impact young Australian workers

Authors

Jo Masters

EY Oceania Chief Economist

Economist. Pundit. Keen tennis player. Referee to teenage girls. Paddle board lover.

Bonnie Barker

EY Oceania, Senior Economist

Urban Renewal and housing economics specialist. Keen squash player. Stand up paddles on the weekend.

10 minute read 29 Jun 2020
Related topics Public policy Workforce

With Australia in recession, young people entering the workforce are experiencing conditions many of us have never seen before. Now more than ever, how they approach this critical period will have a profound impact on their economic future.

Recession. It’s a term etched into our collective psyche. Economic growth was weaker than it had been for a decade even before COVID-19 struck. But it took the supply and demand side shocks from the global pandemic to tip Australia into its first recession since 1992, making it the first time most people under fifty have ever worked through recessionary conditions. Recessions are typically experienced through the jobs market, with people losing jobs, or fearing for their own job security because others around them have lost theirs. Australia’s unemployment rate has now reached a nearly two decade high, and it will take years to return to pre-recession levels - seven years in the case of our last recession.

For young people who completed school or tertiary qualifications in 2020, and are entering the workforce this year, they’re entering a recessionary jobs market. It is unlucky timing. A recessionary jobs market can have a disproportionate medium-term impact on those early in their career and with limited experience, through lower wage growth and fewer opportunities and flexibility. How well young people make it through this critical period will depend on whether they choose to be a passenger, or a driver of their economic future. Proactively making small changes to habits and mindset now, such as increasing savings rates, boosting superannuation contributions and potentially moving jobs if the opportunity presents to upskill, improve the job skills match or boost income can make a material difference (acknowledging these opportunities may be fewer in a recession).

Why the first decade of work matters

EY analysis of census data from the Australian Bureau of Statistics suggests that a person can expect to see between 70 per cent and 90 per cent of their total lifetime income growth occur in the first ten years after they enter the workforce. For example, in the decade to 2016 (the most recent census), the income for people entering the workforce aged 21 rose by 133 per cent. This is compared to the income level of 31 year olds, who over the 10 year period banked a 57 per cent increase, and 41 year olds who saw a 45 per cent increase. For those aged 51, their wages only rose 38 per cent by the time they reached 61. 

In Australia, wage growth is already structurally lower than it has been in other decades. Using the profile from the 2016 Census, our analysis suggests that without a recession income growth for a 21 year old over the next decade from 2020 would have been about 117 per cent, rather than the 133 per cent seen in the above analysis based on the years 2006 to 2016. Given the average full-time salary of a 21 year old in 2019 was $48,000, without a recession their salary would have risen in the ten years to 2030 to be $105,000.

However, analysis by the National Bureau of Economic Research in America found that people starting their career in a recession experience a large initial loss of earning of about 9 per cent, which fades slowly, halving over the first five years but disappearing only after ten years. If we overlay that wage loss profile on the Australian data, we find a cumulative loss of income over those ten years equal to $32,000 for the average 21 year old, meaning our young Australians will have to work for nearly four more months at the end of the decade, to make up the difference. While it might feel like Australia’s economy will bounce back once lockdown is lifted, that won’t change the impact the current recessionary job market will have on recent school or tertiary graduates. That is, the class of 2020 will be adversely affected, whether Australia’s economy starts to recover this year, or later. 

Not just lower income but lower skills-job match

Even for those who are already employed, recessions have an impact through lower wage growth and fewer job opportunities manifesting as fewer promotions, new roles or training. Most obviously, higher rates of unemployment and under-employment mean there is plenty of spare capacity in the labour market, so firms don’t need to ‘bid up’ to attract employees. In addition, older workers tend to stay in the workforce longer to rebuild retirement savings that are typically hit by asset price falls during recessions, and elevated job insecurity means employees are reluctant to ask for a wage rise or move jobs for more money. 

It means for graduates and new entrants to the labour market, it’s not just the challenge of lower income but fewer employment choices, which increases the chance of a weak skills-job match. In a recession, many young Australians are likely to find it difficult to move straight into the role they qualified for, and instead will need to accept a different role and then plan a more circuitous route to their chosen career. Micro-credentialing (short, mini-qualifications focused on specific skills) will become an important option for those seeking to improve their skills-job match which typically results in a boost to income. One benefit they have over other cohorts is being a naturally more tech savvy generation, likely to be more important in the post COVID-19 economy. 

Driver or Passenger: how recessions impact young Australian workers examines the impact of the recession on the average 21 year old Australian entering the workforce in 2020 and looks at six “personas” that vary in age from 18 to 23 years old and in jobs ranging from labourers to law graduates.

Driver or Passenger?

Estimating how many young people start their working life in a particular year is a challenge, particularly in a COVID-19 environment. While the figure is dependent on a number of variables including whether they choose to work, undertake further education or take time off, EY analysis suggests there could be as much as $7 billion in lost income for this current cohort over the next decade.This impacts not only the broader economy through lower discretionary spending, but also an individual’s life goals such as home ownership and saving for retirement. 

EY analysis of the average 21 year old shows that starting out in a recessionary economy results in a $22,000 lower borrowing capacity for a first home, even after a decade of work, which materially reduces a person’s choice of type and location for their home. Moreover, assuming the Superannuation Guarantee contribution rate remains at 9.5 per cent and all else being equal, this group of young Australians should expect about $30,000 less than they otherwise would have had at retirement. While confronting, the good news is that this can be offset if young people choose to be Drivers, rather than Passengers during years of subdued economic activity.

Boost super by $300 a year

Lower income growth means lower compulsory superannuation contributions. But, that impact can be offset by making additional contributions to superannuation as soon as young people enter the jobs market. EY analysis shows that it would only take as little as $300 a year extra to more than make up for the superannuation lost as a result of starting work in a recession. 

Increase savings target

The average savings rate across the population in 2019 was about 4.1 per cent. But for a young person intending to save a house deposit, the savings rate will need to be much higher, with many likely to adopt the broadly used ’20:30:50’ rule, with 20 per cent of income saved, 30 per cent for ‘wants’ and 50 per cent spent on ‘needs’. EY analysis shows that if they can reach a savings target of 25 per cent, it would equate to an extra $28,000 saved over a decade. That in turn would increase their borrowing capacity to buy a home by $141,000. The higher savings target does however translate to a hit to consumer spending with holidays, clothing and entertainment being forsaken in favour of making up the gap. However, whether this group is ready to curb discretionary spending is yet to be seen. The latest EY Future Consumer Index survey taken in early June, suggests that one in five people aged 18 to 25 still plan to increase discretionary spending in the next six months. 

Change roles to increase job-skills match

Young Australians will benefit from having a proactive attitude towards career progression to find a better job-skill match, upskill themselves via additional tertiary education courses, improve their financial literacy and chase higher salaries. According to the Reserve Bank of Australia a person can boost their income by up to 5 per cent when they change jobs. Our above analysis already factors in the number of promotions and job changes that the average 21 year old would have had over the 10 year period. But, if we add an additional move in the fourth year of employment that provides a 3 per cent pay bump, the person would have caught up to non-recessionary income levels within seven, rather than ten years.

This means business should expect to see a rise in the number of job applicants coming from non-traditional areas and with lower skills-job matches, or who have changed jobs more frequently than expected. Hiring managers will benefit from being flexible about applicant tenure length and value broader experience, in short casting the recruitment net wide. The question for organisations more broadly becomes about how they can best retain talented staff over the next few years, especially if cost controls make pay increases difficult. Flexibility, diversity of opportunity (secondments), or additional training, are some ideas. Workforce planning and mapping skills to future roles will also be important if businesses want to attract and identify the best talent.

Be proactive

Governments have a role to play to help this cohort, by boosting financial literacy, focusing on the compounding benefit of tax effective superannuation savings, and talking more about the different avenues to build wealth beyond home ownership (as we discussed in our ‘Is Renting Dead Money’ Report, April 2019). This group of young Australians is also likely to benefit from the shift toward micro-credentialing, as they seek to improve job opportunities and find a strong job-skill match in tough economic times.

Ultimately, proactivity is going to be key for young Australians entering the workforce in a recession. Our analysis shows that the recession affected workforce will be characterised by a Driver-Passenger dynamic based on the level of proactivity demonstrated in the face of fewer job opportunities and subdued economic conditions. These conditions are expected to pull down income growth over the next ten years, but EY analysis shows that a few changes can have a positive impact on the long-term economic health of young Australians. 

Summary

It took the supply and demand side shocks from the global pandemic to tip Australia into its first recession since 1992, making it the first recession most people under fifty have ever worked through. The long-term impact of a recession on those just starting out reflects the important characteristics of the first ten years of a career. 

 

The information provided within this document is general in nature only and does not constitute any form of financial advice. The information has been prepared without taking into account your personal objectives, financial situation or needs and is for information purpose only. Before acting on any information within this document you should seek appropriate legal, tax, and other professional advice.

About this article

Authors

Jo Masters

EY Oceania Chief Economist

Economist. Pundit. Keen tennis player. Referee to teenage girls. Paddle board lover.

Bonnie Barker

EY Oceania, Senior Economist

Urban Renewal and housing economics specialist. Keen squash player. Stand up paddles on the weekend.

Related topics Public policy Workforce