Association for Public Policy Analysis & Management

Human capital theory suggests that students should pursue more education when the local labor market is struggling, particularly if job losses are disproportionately concentrated among high school graduates, because these circumstances are associated with lower opportunity costs of additional schooling. However, credit constraints and incomplete information about financial aid options can prevent students from receiving their optimal level of education. Using WARN Act data on business closings and mass layoffs in Michigan in 2002-2011, I exploit the exogenous variation in local job losses in the year that students graduate from high school, examining changes in college-going rates and substitution between two-year and four-year colleges. A 1-standard deviation increase in per capita job losses is associated with a small but statistically significant 0.2-percentage point (0.3%) increase in the probability of attending college, driven entirely by a 0.3-percentage point (1.2%) increase in the probability of attendance at two-year colleges. In some subgroups, local job losses are associated with a small but significant decrease in attendance at four-year colleges. This result implies that both standard human capital theory and credit constraints have roles in guiding students' college-going decisions in the face of a turbulent labor market.