The last three decades had shown drastic changes in unemployment worldwide. In the US unemployment was low till the early 1970s, it has increased dramatically during the early 1980s, and, more recently, has gone down back almost to the level of the 1960s. This low frequency pendulum is the cradle of a faster moving swing - the business cycle. Business cycles, of course, are not a new phenomenon and not specific to the US. Whether measured by unemployment, employment, output, or by more complex measures, they are present at least throughout the documented economic history of the last century.
This work documents a new set of evidence on cyclical unemployment, employment, and on the cyclicallity of wages, and provides a simple interpretation for these facts. While this work shed new light on the role of education over business cycles the new set of evidence is mainly concerned with the direct effect of parents’ education on the cyclicallity of wages and unemployment within each education group.
The main findings we provide about the role of parents education are:
- 1. Unemployment: (a) For every level of education and age group, average unemployment is higher among those with less educated parents. (b) Within each education group, the gap between the rate of unemployment of those with less educated parents and those with more educated parents increases during recessions. (c) College graduates with educated parents (2/3 of the college graduate group) face no cyclical unemployment (and counter cyclicallity in the incidence of not-working). All results hold true when we control for individual heterogeneity as well as for individuals’ past performance in the labor market.
2. Wages: (a) During recessions, within education group, the wage of those with less educated parents decreases by more than the wage of those with more educated parents. (b) The wage of college graduates with more educated parents increases in absolute terms during recessions. (c) The wage of less educated with less educated parents is highly pro-cyclical.
Needless to say, education is a very important determinant of wages. Perhaps less emphasized but still not all surprising is the fact that education is a shelter against unemployment; individuals with more education earn more and are more employed on average. However, controlling out parents’ education, the cyclical component of both the individual wage and his (un)employment status are not correlated with his education. Relative to himself and controlling for the choice the individual made (occupation, industry, residence and the like) ones own education has little effect on his cyclical experience (if at all) while parents’ education has a strong and robust cyclical effect.
A possible explanation that may come to mind is that of a social network. For reasons to be explained below we tend to rule out this explanation. Our interpretation of these results is therefore different and is based on the hypothesis that human capital is made of two components: The first component is knowledge, that is made of education, experience, etc.. The second component is the human capital experiential part that is made of some components of the cognition, some aspects personality, aspirations, and other general skills which are essential for coping with or adjusting to changes. The study uses parents’ education as a proxy for the inherited, instilled, or bequeathed general skills of the child. Parents take decisions for their heirs, serve as role models, nurture their children and transfer intelligence, temperament, values, working habits, and a long list of other personal characteristics. As a result, parents’ education affects child’s own level of education, as well as his general skills. Thus, controlling for one’s own education, experience and many other measures for knowledge, we can associate the net effect of parents’ education on child’s labor market outcomes with the role of these general skills parents provide.
Assuming parents’ education stands for general skills, interpreting the results is simple, and is composed of three building blocks. The first block is that recessions are times of change. The idea that recessions are time of change was recently used by Ricardo J. Caballero and Mohamad L. Hammour (1993) who build on Joseph A. Schumpeter, as well as by Robert E. Hall (1999). The second building block is our hypothesis from the previous paragraph: It is that the experiential component in human capital, which is made of general skills, is needed more at times of change. This component of human capital, being less specific than education, gains importance at times when new situations are encountered and new tasks or new procedures are to be met. Obviously, both general skills and education are essential. Nevertheless, since education is more specific, we argue that the relative role of general skills increases during times of change. The third building block is that these general skills are not fully contractible, i.e., individuals’ wages are not fully adjusted to compensate for a change in the price of these skills. Given that recessions are times of change, if demand for general skills rises during times of changes, and if general skills are not fully contractible, than during recessions the productivity of individuals who are less endowed with general skills decreases relatively to the productivity of the more endowed ones. Thus, during recessions, within each education group: (a) wages of highly endowed individuals should increase relative to wages of less endowed individuals, (b) the likelihood to be unemployed should increase more for the less endowed individuals too. Our interpretation of the evidence follow directly from this logic.
These findings bring the study close to the debate about the degree of wage cyclicallity. The discussion of wage cyclicallity is usually cast in aggregate time series. Recently, Garry Solon, Robert Barsky, and Jonathan Parker 1995 (hereafter SBP), used data at the individual level to demonstrate that wages are indeed pro-cyclical. While all earlier work we know focused on the composition of human capital in the labor force, our focus is on the composition of human capital within the individual as well as on its composition across individuals, a novel aspect that complements the previous one. While the previous line of research showed that once one corrects for heterogeneity across individuals wages are pro-cyclical, we let some individuals to have pro-cyclical wages while others have counter-cyclical wages. Sorting individuals on the human capital line according to education and parents’ education resolves both the inconclusive results at the aggregate level and the weak pro-cyclicallity at the individual level and shows that the previous, widely held, assumption that recessions are a loose-loose situation hide important differences. For example individuals with high education and high parents’ education see counter cyclical wages.
Obviously, there are other channels through which parents can affect their child’s labor market outcomes. For example, more educated parents usually have higher income and better social contacts, which may also affect labor market outcomes.9 At the end of the day, the distinction between these alternative explanations is an empirical issue. Focusing on individuals with a long experience on the labor market, controlling out the effect of individual history as well as the effect of choices he made (occupation, residency, etc.), and conducting some further tests leave us with the conclusion that this explanation does not fit the data and that the results we present in this study are not in line with the social network hypothesis. In the experiment we conduct, parents’ education captures some general skills the individual obtains and not skills his parents have. Nonetheless, since the effect of parents’ education is not only exogenous to the individual but also permanent to him, understanding wage cyclicallity by parents’ education goes beyond portraying business cycles, and may obtain important welfare implications.
he paper is organized as follows: First, the data is briefly described. Than the new stylized facts are presented. The third section presents the argument and the methodology more formally. The forth tests our hypothesis on unemployment, the fifth tests our hypothesis on the cyclicallity of wages. We than expand on our interpretation and show why it does more justice to the data than alternative explanations. Conclusions are last.
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