Labour market entry and compensatory advantage in times of COVID-19

The compensatory advantage hypothesis predicts that inequalities by parental background are stronger in adverse circumstances. We empirically test this hypothesis by analysing the effects of parents’ earnings on the employment and earnings of labour market entrants during the first year of the COVID-19 pandemic. In addition, we extend the equalisation hypothesis, which predicts that the effect of social origin disappears once students obtain a bachelor’s degree, by investigating whether the compensatory advantage effect was greater among graduates with an upper-secondary vocational degree than among graduates with a higher-tertiary degree. Using detailed Finnish administrative data and event study models, we estimate the effects of graduating during the pandemic on monthly employment statuses and earnings for a treatment group that graduated during COVID-19 compared with a control group that graduated exactly one year earlier. We find that the effects of the pandemic were greater for graduates with a vocational degree than for those with a higher-tertiary degree. Compensatory advantage is found only among graduates with a vocational degree and primarily in employment: while those with higher-earning parents reached “normal” rates of employment by September 2020, graduates with lower-earning parents continued to lag until the end of the follow-up in February 2021.