The Long-Run Effects of Recessions on Education and Income Bryan - PowerPoint PPT Presentation

The Long-Run Effects of Recessions on Education and Income Bryan Stuart George Washington University June 2018 Any opinions and conclusions expressed herein are those of the author and do not necessarily represent the views of the U.S. Census Bureau. All results have been reviewed to ensure that no confidential information is disclosed.

Introduction Recessions receive tremendous attention from economists, policymakers, and the public Most attention focuses on short-run effects on • Workers’ labor market outcomes • Firms’ investment and employment decisions Recessions could have long-run effects, especially via human capital • Past work: Lower opportunity cost increases education • Other mechanisms could dominate for younger individuals • Both sign and size of long-run effects are open questions 1

This paper Setting: double-dip recession in U.S. from 1980-82 • Led to persistent relative decline in earnings per capita in some counties Data: adult outcomes from 2000-13 and birth county for people born 1950-79 Empirical strategy: generalized difference-in-differences 1. People born in counties with more vs. less severe recession 2. People who were younger vs. older when recession began 2

Results: Sizable long-run reductions in education and income People who were born in counties with more severe recession and were children or adolescents during the recession • Are less likely to obtain a college degree • Earn less income • Have higher poverty rates For people age 0-10 in 1979, a 10% decrease in real earnings per capita from 1978-82 leads to • 3.0 p.p. (9.4%) decrease in four-year college degree attainment • $1,300 (3.2%) decrease in earned income • 1.7 p.p. (13.9%) increase in poverty rate Little evidence that states with more generous or more progressive transfer systems mitigated these long-run effects 3

The 1980-82 recession could depress aggregate economic output today Scale diff-in-diff estimates by 105 million people born in U.S. from 1951-79 Aggregate effects from back of envelope calculations: • 0.9-2.1 million fewer four-year college graduates (1-3% of stock in 2015) • $64-145 billion less earned income per year (0.4-0.8% of GDP in 2015) • 0.5-1.3 million more adults in poverty per year (1-3% of stock in 2015) 4

Contribution New evidence showing that 1980-82 recession led to sizable, long-lasting reductions in education and income Contributes to four distinct literatures • Effects of labor market conditions on schooling [Mincer 1958; Becker 1962; Black, McKinnish and Sanders 2005; Cascio and Narayan 2015; Charles, Hurst and Notowidigdo 2015; Atkin 2016] • Long-run effects of early life conditions [Almond and Currie 2011; Heckman and Mosso 2014; Chetty and Hendren 2016] • Welfare costs of recessions [Lucas 2003] • Recessions and subsequent economic activity - cleansing effects [Schumpeter 1939, 1942; Caballero and Hammour 1994; Foster, Grim and Haltiwanger 2016] 5

Background: The 1980-82 recession 6

Measuring local economic activity and the severity of the recession Earnings per capita from BEA (1969-forward) • By county of residence • Primarily from administrative unemployment insurance and tax data Severity of recession: decrease in log real earnings per capita from 1978-82 • Earnings decline captures several possible channels, including job loss • Some economic indicators began to decline in 1979 7

Which counties experienced a more severe recession? Darker color indicates bigger decrease in log real earnings per capita from 1978-82 8

Which counties experienced a more severe recession? Darker color indicates bigger decrease in log real earnings per capita from 1978-82 92 percent of variation is within-region 63 percent of variation is within-state 8

1980-82 recession led to sudden, persistent decrease in earnings per capita in some counties 40000 Mean change in real earnings per capita from 1978-1982 Less severe recession: $44 (0.2%) More severe recession: $-2708 (-10.4%) Real earnings per capita (2014$) 35000 30000 25000 Less severe recession 20000 More severe recession 1970 1974 1978 1982 1986 1990 1994 1998 2002 Year 9

Conceptual framework: Possible long-run effects of a recession on education and income 10

A recession could affect human capital development in childhood Stock of human capital obtained in childhood depends on • Sequence of material and time investments from parents • Sequence of community investments • Initial human capital endowment Recession-induced decrease in local wage and earnings could lead to • Less material investments from parents [Aizer, Eli, Ferrie, and Lleras-Muney 2016; Bleakley and Ferrie 2016; Hoynes, Schanzenbach, and Almond 2016] • More time investments from parents [Aguiar, Hurst, and Karabarbounis 2013; Del Boca, Flinn, and Wiswall 2014; Morrill and Pabilonia 2015] • Less community investments [Carrell, Hoekstra, and Kuka 2016; Chetty, Hendren, and Katz 2016] I focus on individuals born before 1980, so initial human capital is fixed 11

A recession could affect investment in high school or college education In deciding whether to obtain a college degree, individuals trade off • Higher lifetime earnings • Opportunity cost of forgone earnings and cost of tuition Recession reduces opportunity cost [Bound and Holzer 2000; Hoynes, Miller, and Schaller 2012] • Could increase educational attainment [Black, McKinnish, and Sanders 2005; Cascio and Narayan 2015; Charles, Hurst, and Notowidigdo 2015; Atkin 2016] Recession could reduce parents’ ability to finance tuition • Could decrease college degree attainment in presence of credit constraints [Cameron and Heckman 2001; Belley and Lochner 2007; Lovenheim 2011] 12

Data and empirical strategy 13

Data: Outcomes in adulthood and place of birth Newly available confidential data on adult outcomes and county of birth • 2000 Census and 2001-13 ACS linked to SSA NUMIDENT file Sample: people born from 1950-79 who are 25-64 years old in survey • Exclude people if relevant variables are imputed ◮ Sex, race, birth year, birth state, or dependent variables • Exclude people living in group quarters (not in 2001-05 ACS) 14

Regression of interest 1/2 y i , a , c , t = R 78 − 82 π a + x i , a , c , t β + γ c + θ a , s ( c ) + δ t + ε i , a , c , t c y i , a , c , t : long-run outcome of individual i , age a in 1979, born in county c , observed in survey year t R 78 − 82 : 1978-82 decrease in log real earnings per capita for residents of c c x i , a , c , t : individual and birth county covariates γ c : birth county fixed effect θ a , s ( c ) : birth cohort by birth state fixed effect δ t : survey year fixed effect 15

Regression of interest 2/2 y i , a , c , t = R 78 − 82 π a + x i , a , c , t β + γ c + θ a , s ( c ) + δ t + ε i , a , c , t c Sample contains people who were age 0-29 in 1979 29 year olds are omitted reference group: π 29 = 0 • Identified parameters are π a − π 29 • Education: schooling largely completed before recession ( π 29 ≈ 0) • Income: estimates could be biased upwards ( π 29 < 0) Use 2SLS to exploit variation in recession severity driven by pre-recession industrial specialization [Bartik 1991] Details Estimates of π a are likely attenuated due to measurement error in R 78 − 82 c • County of birth differs from 1979 county of residence 16

Results: The long-run effects of the 1980-1982 recession 17

Long-run effects on four-year college degree attainment Comparison Group: .4 Age 23-28 in 1979 .3 Four-year college degree attainment H 0 : π 24 = π 27 = 0 p = 0.519 .2 .1 0 -.1 -.2 -.3 -.4 -.5 0 5 10 15 20 25 30 Age in 1979 18

Long-run effects on four-year college degree attainment Exposed to Recession: Comparison Group: .4 Age 0-22 in 1979 Age 23-28 in 1979 .3 Four-year college degree attainment H 0 : π 24 = π 27 = 0 p = 0.519 .2 .1 0 -.1 -.2 -.3 -.4 -.5 0 5 10 15 20 25 30 Age in 1979 18

Long-run effects on four-year college degree attainment Exposed to Recession: Comparison Group: .4 Age 0-22 in 1979 Age 23-28 in 1979 .3 Four-year college degree attainment 10% decrease in earnings per capita from 1978-1982 H 0 : π 24 = π 27 = 0 9.9% (3.2 p.p.) decrease in 4-year degree attainment for 6 year olds p = 0.519 .2 .1 0 -.1 -.2 -.3 -.4 -.5 0 5 10 15 20 25 30 Age in 1979 18

Long-run effects on education Dependent variable: HS/GED attainment (1) Panel A: Interaction between 1978-82 decrease in log earnings per cap. and age in 1979 0-10 0.039 (0.039) 11-19 0.038 (0.031) 20-28 0.017 (0.026) Panel B: Average value of dependent variable in years 2000-13, by age in 1979 0-10 0.936 11-19 0.932 20-28 0.933 19

Long-run effects on education Dependent variable: Any HS/GED college attainment attendance (1) (2) Panel A: Interaction between 1978-82 decrease in log earnings per cap. and age in 1979 0-10 0.039 -0.038 (0.039) (0.052) 11-19 0.038 -0.099 (0.031) (0.066) 20-28 0.017 -0.054 (0.026) (0.051) Panel B: Average value of dependent variable in years 2000-13, by age in 1979 0-10 0.936 0.588 11-19 0.932 0.537 20-28 0.933 0.540 19