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Skill Substitution, Expectations, and the Business Cycle

Andreas Leibing

TL;DR

The paper investigates how labor-market conditions at high school graduation shape postsecondary skill investments in Germany, using a Roy-model framework and administrative microdata to separate national (macro) from state/local (micro) shocks. It finds procyclical college enrollment driven mainly by macro shocks, with unemployment increases reducing enrollment at traditional universities and nudging graduates toward vocational colleges and apprenticeships; attainment shifts align with these enrollment changes. The main mechanism operates through changes in expected returns to degrees, where downturns lower the perceived value of academic degrees while vocational returns remain stable, especially for lower-ability or low-SES students. The study highlights the importance of outside options and macro- versus local-dynamics in shaping educational choices, with implications for policy design in systems featuring robust vocational pathways.

Abstract

This paper studies how labor market conditions around high school graduation affect postsecondary skill investments. Using administrative data on more than six million German graduates from 1995-2018, and exploiting deviations from secular state-specific trends, I document procyclical college enrollment. Cyclical increases in unemployment reduce enrollment at traditional universities and shift graduates toward vocational colleges and apprenticeships. These effects translate into educational attainment. Using large-scale survey data, I identify changes in expected returns to different degrees as the main mechanism. During recessions, graduates expect lower returns to an academic degree, while expected returns to a vocational degree are stable.

Skill Substitution, Expectations, and the Business Cycle

TL;DR

The paper investigates how labor-market conditions at high school graduation shape postsecondary skill investments in Germany, using a Roy-model framework and administrative microdata to separate national (macro) from state/local (micro) shocks. It finds procyclical college enrollment driven mainly by macro shocks, with unemployment increases reducing enrollment at traditional universities and nudging graduates toward vocational colleges and apprenticeships; attainment shifts align with these enrollment changes. The main mechanism operates through changes in expected returns to degrees, where downturns lower the perceived value of academic degrees while vocational returns remain stable, especially for lower-ability or low-SES students. The study highlights the importance of outside options and macro- versus local-dynamics in shaping educational choices, with implications for policy design in systems featuring robust vocational pathways.

Abstract

This paper studies how labor market conditions around high school graduation affect postsecondary skill investments. Using administrative data on more than six million German graduates from 1995-2018, and exploiting deviations from secular state-specific trends, I document procyclical college enrollment. Cyclical increases in unemployment reduce enrollment at traditional universities and shift graduates toward vocational colleges and apprenticeships. These effects translate into educational attainment. Using large-scale survey data, I identify changes in expected returns to different degrees as the main mechanism. During recessions, graduates expect lower returns to an academic degree, while expected returns to a vocational degree are stable.
Paper Structure (17 sections, 7 equations, 13 figures, 18 tables)

This paper contains 17 sections, 7 equations, 13 figures, 18 tables.

Table of Contents

  1. Introduction
  2. Institutional Background
  3. Conceptual Framework
  4. Data and Identification
  5. Main Data Sources
  6. Descriptive Evidence
  7. Identification
  8. Effects of business cycle variation
  9. College Enrollment
  10. College Attainment
  11. Apprenticeships
  12. Decomposing Variation in Unemployment
  13. Mechanisms
  14. Expectations
  15. Alternative Mechanisms
  16. ...and 2 more sections

Figures (13)

  • Figure I: A Roy model of skill investment
  • Figure II: Time Series of Enrollment and Unemployment
  • Figure III: Business cycle variation across states and commuting zones
  • Figure IV: Aggregated business cycle variation in enrollment and unemployment
  • Figure V: Marginal state UR effects on implicitly expected returns to college by covariates
  • ...and 8 more figures