Students who start university when the economy is in bad shape end up with higher pay than other cohorts – on average, an additional £1,200 per every working year. That is the central finding of research by Alena Bičáková, Matias Cortes and Jacopo Mazza, to be presented at the Royal Economic Society''s annual conference at the University of Sussex in Brighton in March 2018.
Their study analyses UK Labour Force Survey data for the years 1998 to 2016 to compare outcomes of cohorts who enrolled in university at different points of the business cycle between 1960 and 2010. They conclude that the better labour market outcomes for those who start in a recession must result from an increased effort these cohorts exert during their studies. The data provide supporting evidence, revealing that cohorts who enrol when unemployment is high have above-average grades.
Three mechanisms may induce higher effort among these cohorts: first, higher enrolment in bad economic times leads to higher competition. Second, when unemployment is high, it is more difficult to find a job while studying, so the students are likely to work less and concentrate more on their studies. Third, experiencing economic downturn when they go to university, the students may worry about their own future outcomes and study harder.
Does the state of the economy during the college years affect students'' future? Previous research shows that graduating from college during a recession has a long-lasting negative impact on wages and other labour market outcomes. Do economic conditions at the time of entry to college also matter?
The researchers address this question and explore the relationship between the stage of the business cycle at the time of college enrolment and future labour market outcomes.
The existing evidence suggests that college enrolment is higher at times of high unemployment. As a consequence, larger cohorts are likely to be of lower average quality, as they also include marginal students who would not have entered college during better times. Do cohorts that enter college during recession then have lower wages and worse labour market outcomes compared with cohorts that enter college in better economic conditions?
Surprisingly, the study finds the opposite. The average wages of cohorts that enter college at bad economic conditions are higher compared to other cohorts. In particular, the researchers use UK Labour Force Survey data for the years 1998 to 2016 to compare outcomes of cohorts who enrolled into college at different points of the business cycle between 1960 and 2010.
They show that a rise in unemployment rate at the time of enrolment by one standard deviation increases wages by 2.5%. This positive impact is highly persistent and amounts to approximately additional £1,200 per every working year.
Is it that the cohorts who enrol in bad economic conditions have lower employment rate, so that only those with the highest wages work? Or do they choose more financially rewarding fields of study or work in more profitable occupations or industries? The researchers show that their finding is not driven by differences in cohort compositions along any of these dimensions.
Do then cohorts who enrol in recessions tend to graduate into good economic times that positively affect their wages? Neither this hypothesis is supported by the data. Wages are higher even when comparing cohorts with the same economic conditions at the time of graduation.
Why then bad economic conditions at college entry increase cohorts'' future wages? The study considers several channels that may explain this fact.
Are individuals who decide to enrol into college when unemployment is high just on average better? As argued above, higher enrolment in bad economic times should result in cohorts of below-average quality and this is, indeed, supported by the data: cohorts who enrol at times of high unemployment have worse school grades compared with other cohorts. So what could explain their higher wages?
The researchers argue that the better labour market outcomes must result from an increased effort these cohorts exert during their studies. The data provide supporting evidence, revealing that cohorts who enrol when unemployment is high have above-average grades. They propose three mechanisms that may induce higher effort among these cohorts:
• First, higher enrolment in bad economic times leads to higher competition.
• Second, when unemployment is high it is more difficult to find a job while studying, so the students are likely to work less and concentrate more on their studies.
• Third, experiencing economic downturn (e.g. observing people losing jobs or firms getting bankrupt) when they enter college, the students may worry about their own future outcomes and study harder.
While all three explanations provide plausible justification for the increased effort, none can be directly tested with the data. It remains an open question for future research to determine which of the three factors is the most important.
Whatever the mechanism that leads to better performance and higher wages of cohorts that enter college in bad economic times is, our findings sends a clear signal that it is not a good idea to limit educational funds and to curb enrolment into college in recessions.
Caught in the Cycle: Timing of Enrolment and Labor Market Performance of University Graduates by Alena Bičáková (CERGE-EI), Matias Cortes (York University) and Jacopo Mazza (University of Essex).