Negative economic shocks can have long term effects on individuals. Displaced workers face potentially lower future earnings, reduced access to credit, as well as higher mortality rates (Oreopoulos et al. 2006; Schmieder and von Wachter forthcoming; Sullivan and von Wachter 2009). College students who graduate during bad economic conditions are likely to suffer from long term wage losses compared to their luckier peers (Oreopoulos et al 2006; Stevens 2008; Kahn 2010). However, for youth who are facing the decision of graduating from high school, acquiring post secondary education, or entering the labor force, the impact of high unemployment on schooling decisions is theoretically ambiguous, and may be beneficial (Gustman and Steinmeier 1981; Dellas and Koubi 2003; Bedard and Herman 2008). While the opportunity cost of attending school decreases during periods of bad economic conditions, the financial means available to fund education are likely to decline as well.
Consequently, numerous empirical studies have focused on estimating the relationship between bad economic conditions and schooling. Most studies focus on specific schooling choices and suggest that schooling is counter cyclical that is, higher unemployment rates are associated with an increase in the schooling measure used (Betts and McFarland 1995; Black and Sufi 2002; Sekalaris and Spilimbergo 2000; Dellas and Sekellaris 2003; Kahn 2010). A smaller number of studies fail to document an impact of higher unemployment on schooling (Corman 1983; Kane 1994; Card and Lemieux 2000; Berger and Kostal 2002).
This paper also investigates the impact of higher unemployment rates experienced before high school graduation on completed educational attainment, the probability of college graduation, and the probability of high school graduation. In contrast to existing studies, which focus on estimating the "average" effect of economic cycles on education, we hypothesize that the link between bad economic conditions and schooling decisions varies by individual ability and might also vary by the available parental resources, gender, and their interactions.
It is likely, for example, that higher unemployment rates do not impact the choice to enroll in college for individuals in the highest percentile of the ability distribution because they would have enrolled independent of the economic conditions during high school. Low ability individuals, on the other hand, who are at the highest risk to drop out of high school during normal economic conditions might increase their educational attainment in response to worse economic conditions. Thus, we anticipate the relationship between higher unemployment rates while in high school and subsequent educational attainment to be strongest for individuals that are "on the margin" between two different educational choices.
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The Effect of Business Cycles on Educational Attainment
