Something strange and potentially shocking is happening in the job market for young, educated workers.
According to the New York Fed, the working conditions for college graduates in recent months have “significantly deteriorated”, with unemployment now being an unusually high of 5.8%. Even the newly cast MBAs of Elite Program are struggling to find jobs. Meanwhile, law school applications are surging – an ominous echo is that young people use graduate school to lower bunkers during the big financial crisis.
What's going on? I saw three reasonable explanations, each of which might be a bit true.
The first theory is that the labor market for young people has never fully recovered from the coronavirus pandemic, or even arguably recovered from the Great Depression. "It's much harder for young people to find jobs than before, and it's been going on for at least 10 years," David Deming, an economist at Harvard University, told me. The Great Depression not only led to massive layoffs, but also caused freezes from many employers and caused special difficulties for young people. After unemployment peaked in 2009, it took the labor market some time to recover and slowly improve until the pandemic ruined the progress. Just as the technological boom seemed to be a corner, inflation exploded rapidly, causing the Fed to raise interest rates and cool demand across the economy. The white-collar industry (especially technology) is the most popular industry. The number of job openings in software development and IT operations plummeted. Since 2022, the share of jobs published in software programming has indeed dropped by more than 50%. The market is simply not as strong as new graduates looking to start a career in technology, consulting or finance.
The second theory points to a deeper, more structural transformation: universities do not give the labor advantages they had 15 years ago. According to a research by the Federal Reserve in San Francisco, 2010 marked a turning point, when the lifelong gap between college and high school graduates no longer widened. Meanwhile, online job posting shares seek workers with college degrees.
It should be clear: universities can still pay off on average. The salary premium for colleges will never rise forever, and non-university workers have done better since 2010, and that’s not bad news. Actually it is Great News for less educated workers. But the result is a labor market where the return on investment of universities is even more uncertain.
The third theory is that the relatively weak labor market for college graduates may be an early sign that artificial intelligence is beginning to change the economy.
"This is what young college graduates do when you think from the first principle about what generation AI can do, and what jobs it can replace," Deming told me. "They read and synthesize information and data. They generate reports and presentations."
Then, consider a novel economic indicator: the recent student gap. This is the difference between young college graduates’ unemployment and overall workforce. Dating back forty years, young college graduates are almost always much lower (and sometimes much lower) than the overall economy because they are relatively cheap labor and spend four years in a (theoretical) rich environment.
But the recent student gap last month hit an all-time low. That is, today's college graduates enter an economy that young college graduates are worse than any of the following months, dating back at least forty years.
A strong explanation for this picture is that this is exactly what one expects to see whether companies have replaced young workers with machines. As law firms rely on AI for more paralegal work, consulting firms realize that five 22-year-olds with Chatgpt can complete the work of 20 recent graduates, while tech companies handed over their software programming to a handful of superstars with AI Copilots, in partnership with AI Copilots, the entry-level level of the U.S. white-collar economy will contract. A chaotic Trump economy can make things worse. Recession can accelerate technological change as businesses use downturns to cut less efficient workers and reduce productivity from any technology available. High spending on AI infrastructure can be squeezed into spending on new employees even if employers don’t directly replace AI with human workers.
Fortunately, for humans, there is a need for doubts about strong explanations. On the one hand, the possible increase in boost productivity that intellectual explosions can result in is difficult to find in the data. For another, the New York Fed's survey of companies last year found that AI was negligent about hiring. Karin Kimbrough, chief economist at LinkedIn, told me she has not seen clear evidence of work displacement due to AI. Instead, today’s graduates are entering uncertain economies, with some businesses so focused on tomorrow’s profit margins that they are less willing to hire a large number of entry-level workers who “regularly spend time learning to work.”
Regardless of explanation, the Young Grads' labor market is flashing yellow. This may be a signal of a short-term economic drag, or a medium-term change in the value of a university degree, or a long-term change in the relationship between human and artificial intelligence. This is a number worth paying attention to.