The next generation of Australian workers face a decade of pay cuts and 'psychological scarring', the government predicts

Australians about to enter the workforce face a tough slog. (Geography Photos, Universal Images Group via Getty Images)
  • Treasury has warned young Australians face ten years of pay cuts as the economy enters a recession.
  • With youth unemployment having spiked just shy of 5%, it says graduates can expect to “earn roughly 8% less in their first year of work and 3.5% less after five years”.
  • That’s on top of the “scarring” to be dealt out by diminished career prospects and wasted potential.
  • Visit Business Insider Australia’s homepage for more stories.

Australians who enter the workforce for the first time in the midst of the coronavirus pandemic can expect to pay for it for almost a decade.

New analysis released by Treasury this week has quantified the burden to be borne by the nation’s youngest workers.

“Australians graduating into a state and year with a 5% higher youth unemployment rate can expect to earn roughly 8% less in their first year of work and 3.5% less after five years,” Treasury economists wrote in the working paper, noting that the effective pay cut only “gradually fades” after a decade.

With the latest official figures showing youth unemployment has spiked to 16.4% – a jump of 4.8% in the last three months – it’s a reality facing hundreds of thousands of Australian school leavers and university graduates.

In fact, government forecasts suggest circumstances will get worse before they get better. Unemployment is expected to continue rising until Christmas, with youth unemployment to lift higher still. As JobKeeper is phased out, there’s a risk even more Australians will drop out of the labour market. altogether.

“These initial setbacks may be particularly damaging given the critical role of the early phase of the career — with estimates that almost 80% of lifetime wage increases occur within the first decade of an individual’s career,” the economists wrote.

While much has been made of the state of the workforce today, it’s a sobering indication of what the youngest generation will bear throughout the next decade.

Cumulating over the years, such “scarring” will end up costing a large number of people tens of thousands of dollars before they hit 30. Compounded over a working life, those losses in retirement are significant at a time when many have already emptied their superannuation accounts.

Of course, they won’t have to wait until retirement to notice the difference. “Given their greater sensitivity to changing economic conditions, those graduating in a recession likely face worse career prospects in the near term,” the paper reads.

While noting the lasting consequences remain unclear, the economists wager the skills of workers will deteriorate as they struggle to find work that fits them.

“After an initial setback, climbing back up the career ladder will take time, and may be difficult if employers fail to recognise the role of bad luck in early career struggles,” Treasury wrote.

“Finally, there may be ‘psychological’ scarring with graduates adjusting down their aspirations when faced by a shock during a particularly formative period.”

It’s no wonder then some are demanding the federal government try a new tack to deal with the new normal. Progressive ideas, from the introduction of pandemic leave to a long-term ‘job guarantee’, appear to be gaining traction amongst the group likely to be hit hardest by an Australian recession – the first in their lifetimes.

Naturally, the nation’s beancounters aren’t entertaining such ideas in this specific analysis. The need for reform, however, is evident.

Treasury’s view is that the first port of call is to encourage greater ‘labour mobility’ to enable workers to more easily move to better businesses paying higher wages as well as increase competition between companies.

While both sound like good long-term objectives, market dynamics look like they’ll be hard to shift for young Australians concerned about their job prospects today. Estimates point to there being an average of one job for every 13 potential applicants right now.

It’s clear that if that ratio isn’t corrected quickly, young Australians face a rough road ahead.

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