I study how a temporary increase in the opportunity cost of schooling affects educational attainment and subsequent labor market outcomes.
Exploiting a salient tax reform that led to labor earnings not being taxed for a year and comparing individuals above and below compulsory schooling age, I document reduced enrollment and increased dropout from upper-secondary school.
While some students eventually return to school there is a permanent loss in educational attainment of about one month, driven by young men dropping out of academic tracks. In line with students dropping out of school to work, I estimate a positive effect on employment and earnings in the short run. However, these male dropouts loose out in the long run. By age 40, their cumulative earnings are 5.5% lower than otherwise.
These results are consistent with economic booms having a ‘scarring effect’ on schooling, where students that drop out when opportunity costs rise are students that would otherwise have benefitted from staying longer in school.
Assistant Professor at Norwegian School of Economics