Association for Public Policy Analysis & Management

The Great Recession has received tremendous attention from policymakers, scholars, and the public, who all wish to understand how the economic downturn affected labor market outcomes, welfare payments, and firms’ decisions to produce and invest. A question with limited attention, but potentially influences all three major outcomes of interest, is what is the effect of the Great Recession on human capital. While some studies find that reduced labor market opportunities increased educational attainment (Mincer 1958; Becker, 1962; Charles, Hurst, and Notowidigdo, 2015; Atkin, 2016), it is unclear how earlier investments in human capital such as primary education are impacted by reduced family, neighborhood, and school resources. This question is of particular interest as recent research shows a strong relationship between the availability of resources in early childhood on later life outcomes such as earnings, poverty, and incarceration (Jackson and Johnson 2018).

Therefore, in this study, we estimate the impact of the Great Recession on student achievement, a measure human capital for children and adolescents. Although governments cannot directly influence family and neighborhood investments into a child’s human capital capacity, fiscal institutions can have a direct effect on school spending, which is an important resource for children’s development of knowledge, habits, as well as social and personality attributes (Lafortune, Rothstein, Whitmore Schanzenbach 2018; Jackson, Johnson, and Persico 2015; Hyman 2017). Yet, the impacts of fiscal institutions on human capital during the Great Recession have largely been ignored. Hence, we are interested in if fiscal institutions such tax and expenditure limits, school finance reforms, teacher unions, balanced budget requirements, savings, and debt limits exacerbate or mitigate recession effects on human capital.

To answer our research questions, we use data from several sources. Information on school districts’ finances comes from the National Center for Education Statistics (NCES) Common Core of Data School District Finance Survey (F-33). We complement our finance data with socio-economic information on school districts from the NCES Public Elementary/Secondary School and District Universe Surveys, the U.S. Census Bureau, and the American Community Survey (ACS). Student achievement is measured using the National Assessment of Educational Progress (NAEP). We identify fiscal institutions by utilizing prior research (Fording, 2018; Lafortune, Rothstein, and Whitmore Schanzenbach, 2018; Lincoln Institute of Land Policy, 2018; Mullins and Wallin, 2004; Pew Research Center, 2018; Rueben and Randall, 2017; and Winkler, Scull, and Zeehandelaar, 2012).

Our empirical framework is based on a difference-in-differences framework utilizing a treatment that differentiates between the severity of the Great Recession on state and local economies and using time and school district fixed effects with a host of control variables. Preliminary findings suggest that the Great Recession had large effects on school spending and student achievement. Fiscal institutions of tax and expenditure limits, school finance reforms, and debt limits exacerbate recession effects, while savings, united governments (the same political party affiliation of the Governor and a majority in the state house and senate), and strong teacher unions mitigate the impact of the Great Recession.