The Long Run Impact of a Macroeconomic Crisis on Schooling Outcomes

The effect of an aggregate economic shock on human capital formation is theoretically ambiguous. When real wages fall during a recession, households face both a drop in their real incomes, as well as lower wages in available jobs. The impacts, particularly in the long run, on educational attainment and labour market outcomes is uncertain. I exploit the heterogeneous impact of an economic recession as measured by the variation in rice price increases to find that, for net consumers of rice, higher rice price increases are associated with small declines in school participation for younger children, who have limited labour market opportunities, and large declines in employment for older children, who face higher opportunity costs of schooling. The results are reversed for net producers of rice. The fall in wages protects older children from suffering adverse long-run consequences to their educational attainment. However, children who face higher wages during critical junctures in their schooling are more likely to start working and face reductions in human capital investments. These differences in investments have significant long-term effects on later-life income, employment status and sector of employment.