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Explaining upper secondary school dropout: new evidence on the role of local labor markets

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Abstract

According to standard human capital theory, local labor market conditions affect individual schooling decisions mainly through two channels: (1) the opportunity cost of schooling, and (2) the returns to education. This paper assesses the impact of both these channels on upper secondary school dropout among Norwegian youth in the period 1994–2006. The effect of local labor market conditions is measured using variation in youth outflow rates from unemployment to employment across regions over time. The results show that local labor market conditions play a substantial role in individual dropout decisions in Norway, with elasticities ranging from 0.1 to 0.3. The opportunity cost of schooling seems to weigh more in the dropout decision for Norwegian youth than the expected returns. However, the results are highly sensitive to the choice of local labor market indicator. When including the unemployment rate, which is the standard indicator used in empirical applications of schooling decisions, instead of the outflow rate, the estimates become smaller and in most cases insignificant. This indicates that previous studies of school dropout may have understated the importance of local labor market conditions.

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Notes

  1. Hanushek and Woessmann (2012) investigate the association between cognitive skills and economic growth and find support for a causal interpretation of the impact of skills produced in schools on economic growth.

  2. See Card and Lemieux (2001) for an excellent presentation and discussion of this framework.

  3. Some recent examples of studies investigating the relationship between higher education choices and labor market conditions are Dellas and Sakellaris (2003) looking at college enrollment in the US; Pietro (2006) investigating university dropout in Italy and Messer and Wolter (2010), investigating time-to-degree in Switzerland. All mentioned studies find a significant impact of labor market conditions on the education choices studied.

  4. This means that the right must be utilized within the year the individual turns 24.

  5. Figures from Statistics Norway show that the take-up rate has been relatively stable since the introduction of Reform94 in 1994.

  6. Before 2006, the total number of programs was 16: three academic study programs and 12 vocational programs.

  7. Figures provided by Statistics Norway, http://www.ssb.no.

  8. One reason for the large reenrollment rates among Norwegian adults may be the combination of free of charge upper secondary education and great loan facilities for students.

  9. The economic regions are defined by Statistics Norway.

  10. More specifically, the model is estimated using the command xtcloglog in STATA.

  11. Academic programs offer three fields of study: General, economics, and management studies; Music, dance, and drama; Sport and physical education. Vocational programs consist of 12 different study fields: Health and social studies; Agriculture, fishing, and forestry; Arts, crafts, and design studies; Hotel and food-processing trades; Building and construction trades; Technical building trades; Electrical trades; Engineering and mechanical trades; Chemical and processing trades; Woodworking trades; Media and communication; and Sales and service.

  12. In order to check for endogeneity, I have done a Durbin–Wu–Hausman test where the youth outflow rate is instrumented using the outflow rate for skilled (having at least completed upper secondary education) adults (25–55 years old). The instrument is highly significant in the first stage, with f tests ranging from 11893.67 to 16648.47. In the second stage, the residual from the first stage is added to the model together with the full set of coefficients. The residuals do not enter any of the specifications significantly, which supports the conclusion that endogeneity is not a great concern in this setting.

  13. One solution would be to bootstrap the standard errors by region. This is however problematic, as the model includes region dummies. When the bootstrap samples are drawn, not all samples include all 89 regions. This leads to missing coefficients, and the bootstrap fails.

  14. A problem with register data and youth is that many youth have few rights to benefits based on previous labor market income. As shown in Table 5, a large part of the youth is not found in any of the official registers. Some of these youth may be at home with children, but have no rights to birth benefits (and is thus not found in the birth-benefit-register). Some may be abroad traveling, and others again may just be inactive. In other words, youth not found in the registers are a very heterogeneous group.

  15. Table 7 corresponds to column (2) in Tables 2 and 3. Complete estimation results including duration dependence, year, and region dummies are available upon request.

  16. Note, however, that Falch and Strøm (2013) find that after controlling for achievement at the end of compulsory school, much of the importance of the family background variables disappears.

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Acknowledgments

This paper is part of the project “The Educational System in Norway”, funded by the Norwegian Research Council. I am grateful for useful comments and suggestions from Erling Barth, Pål Schøne and Steinar Strøm, as well as three anonymous referees.

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Correspondence to Kristine von Simson.

Appendix

Appendix

See Tables 9, 10, 11 and 12.

Table 9 Number of students in each cohort
Table 10 Means and standard deviations of outflow unemployment rates
Table 11 Correlation coefficients of outflow unemployment rates
Table 12 Main activity and main task for youth and dropouts 16–24 years in the 2001 LFS

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von Simson, K. Explaining upper secondary school dropout: new evidence on the role of local labor markets. Empir Econ 48, 1419–1444 (2015). https://doi.org/10.1007/s00181-014-0829-3

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