Transitory Earnings Opportunities and Educational Scarring of Young Men

Exploiting a tax reform that lowered income taxes to zero for a single year, I study the consequences of a transitory increase in the opportunity cost of schooling. Using a regression discontinuity design that compares teenagers above and below the compulsory schooling age, I document increased school dropout. There is a permanent loss in young men’s educational attainment but no effects on women. Earnings of male dropouts fall behind during early adulthood and they suffer substantial losses in lifetime earnings relative to the control group. In addition, dropouts suffer misfortune through slower career progression, less marriage, and reduced fertility. The results are consistent with misperceived returns to education, either due to dropouts underestimating returns or overvaluing immediate gains relative to future payoffs. My results imply that economic booms can have a ‘scarring effect’ on human capital, potentially reducing aggregate labor productivity permanently.

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