Martina needs to finish this semester to graduate in 2023, with a bachelors degree in business from CSU Fullerton (CSUF). She is currently a student at CSUF and has a stable part-time job working in the front office of small medical practice. Each year she earns about $12,000 from this job.

First New Job After Graduation and Risk of a Recession

Currently, there is no economic recession and the unemployment rate is low: the unemployment rate is just below the natural rate of unemployment. In the future, however, the unemployment rate may increase or decrease.

In an economics class, Martina learns from a research study that the unemployment rate can matter a lot to new college graduates. Someone who graduates from college during a recession (which results in high unemployment), compared to someone that does not graduate in a recession, is predicted to earn relatively lower wages in their first job and continue to earn relatively lower wages for 10 years after graduation!

For Martina, whether she graduates in an economy with a high or low unemployment rate, she would still get raises over time as she obtains more job experience. However, the research study says that graduating in a recession means that Martina would start from a relatively lower point, in terms of wages, than if she did not graduate during a recession.

Specifically:

• For a recent college graduate, a 5 percentage point increase in the unemployment rate (such an increase has occurred during the prior recession) is linked to a 9 percent lower annual wage.
• Five years after graduating, a graduates annual job earnings are predicted to be 4 percent lower compared to if the economy had a lower unemployment rate (not in a recession) at the time of college graduation.

One of the potential reasons for this observed relationship between recessions and wages is that the first job after graduation is a stepping stone towards career advancement. In recessions, the first job after graduation for students may not be as helpful of a stepping stone (i.e., a bad stepping stone) , because better jobs (i.e., better stepping stones) are harder to find.

Here are past U.S. unemployment rates:

• Apr-Jun, 2019: 3.6%
• Apr-Jun, 2020: 13.1% (big jump due to pandemic shutdowns)
• Apr-Jun, 2021: 6.0%
• Apr-Jun, 2022: 3.6%
• Jan-Mar, 2023: 3.5%
• Apr-Jun, 2024 ? %

Potential Impact: Martinas Future Career

Knowing the information above, Martina is hopeful the unemployment will remain low when she graduates this year. If she were to graduate later, say in 2024, it is less clear whether the economy will be in a recession or not. Recessions are hard to predict. For example, who could have predicted the pandemic-induced recession of 2020?

If the economy were to later be in a recession, she may not get as good of a job (not as good of a stepping stone job) that will not advance her career as well. As a result, her pay may not increase as much each subsequent year!

In any case, Martina knows that her first full-time job after graduating this year will likely pay approximately $50,000 per year.

Delay Graduation by One Year: To Earn a Second Bachelors Degree?

Though Martina can graduate this year, Martina is considering a second (double) major in economics. If she does this she will take one more year to graduate (in 2024) with two bachelors degrees: one in business and one in economics. Martina would keep her part-time job paying $12,000 per year during the additional time it takes to graduate. However, she would be unable to take any other job during this extra year, including the $50,000-job described above.

A Second Bachelors Degree: Economics?

Martina also learns of data from 2018 indicating that bachelors degree earners in economics earned $15,000 more per year than those with only a bachelors degree in business, on average. Moreover, the same data show that economics majors had a 38% lower unemployment rate than those with only a bachelors degree in business, on average. It was 3.7% for Business majors and 2.3% for Economics majors: (2.3-3.7)/3.7 = -38%.

Again, as described above, for all majors, if the unemployment rate increases even more (for all majors) by the time she graduates in 2024, her first full-time job might not be as good of a stepping stone towards faster career advancement and future earnings increases.

Future Inflation and Real Income

Another important economic consideration for Martina is inflation. If the inflation rate remains high as it is today, the prices of things she buys (gasoline, rent, food, tuition, books, fees, clothing, etc.) will increase a lot each year. High inflation could be a hardship because the cost of her expenses will rise but the pay for her part-time job and other future employment may not. Her current part-time job will not provide more hours for her to work.

Here are past annual inflation rates:

An annual rate of inflation of 7.0% means that expenses of $10,000 would cost $10,700 one year later and $11,449 two years later!

Note, in case you are confused about the unemployment rate and the inflation rate:

• The unemployment rate is calculated using numbers from a single point in time. In December, 2021, the unemployment rate was 3.9%. This is calculated from the number of unemployed persons and the size of the civilian labor force (in December 2021).
• The inflation rate is based on change over time: e.g., prices rose by 7.0% BETWEEN December 2020 and December 2021.
• This difference is similar to saying the Lakers scored 100 points in the first game (point in time) and 110 points in the second game (another point in time). The increase in points scored between the two games was 10%: (110-100)/100 = 10%.

• 1A. Why would Martina double major in Business and Economics and graduate in 2024?

  1B. Why would Martina major only in Business and graduate in 2023?

  2A. Which is the best decision for Martina: (a) Double Major in Business and Economics and graduate in 2024 or (b) Major only in Business and graduate in 2023?

  2B. Briefly justify your decision with at least two supporting reasons. At least one of your reasons should involve at least one economic concept from Module 3. (Answer must be a minimum of three complete sentences.)