The Impact of Local Labour Market Conditions on School Leaving Decisions

Alberto Tumino, University of Essex
Mark Taylor, University of Essex

We use data from the British Household Panel Survey and Labour Force Survey to examine the relationship between the demand for post compulsory education and prevailing labour market conditions in Britain. Our analysis explicitly incorporates credit constraints by allowing effects to differ between young people whose families are home owners and those whose families are not. We find that youth unemployment reduces school dropout at age 16 among potentially constrained individuals, while adult unemployment increases their probability of leaving school. Therefore credit constrained youths, who are on average less likely to access further education, are also those more sensitive to the impact of prevailing labour market conditions on the opportunity cost of schooling and on the expected returns to education. This suggests that policies aimed at helping the economy recover from recession should further seek to increase the net gains from education for youths, particularly among those facing liquidity constraints.