The degree to which increased wages induce students to leave school and encourage youth who are neither employed nor in school to enter the labour market is an important issue highlighting a key aspect of human capital formation: studying and acquiring formal education versus working and gaining labour market experience.
One empirical challenge that researchers face when examining this issue is finding plausibly exogenous variation in the wage offers received by youth.
This study tackles this issue by using variation in wage growth induced by increases in world oil prices observed between 2001 and 2008.
The empirical strategy relies on three facts. First, Canada’s oil reserves and, consequently, its oil production are concentrated in three Canadian provinces: Alberta, Saskatchewan, and Newfoundland and Labrador.
Second, the proportion of young men employed in the oil industry differs markedly across provinces and education levels. Within the two largest oil-producing provinces, young men with a high school diploma and young men who have less than a high school diploma are employed in this sector to a greater extent than their better-educated counterparts.
Third, oil prices received by Canadian oil producers more than doubled between 2001 and 2008.
Taken together, these facts suggest that the substantial increases in world oil prices observed between 2001 and 2008 may have induced cross-regional and cross-educational variation in young men’s labour demand and, thus, in young men’s wage growth.
Using data from the Canadian Labour Force Survey, the study examines this variation in wage growth to assess the causal impact of wages on young men’s school enrollment and likelihood of being neither enrolled in school nor employed.
The main finding is that increased wages have a dual impact for young men: they tend to reduce their full-time university enrollment rates―at least temporarily―and to bring (back) into the labour market those who were neither enrolled in school nor employed. Contrary to previous research from the United States, the study finds no evidence that school enrollment rates of less-educated young men fall in response to increased pay rates, whether these are measured in real terms or relative terms. These findings hold under a variety of robustness checks and do not appear to be driven solely by selective migration.
Do increased wages lead to a net increase in youth human capital? The answer depends on whether reductions in school enrollment are permanent or temporary and on the extent to which the long-term employability of lower-skilled youth increases as they are drawn into the labour market. Recent evidence suggests that some previous oil booms (e.g., that observed in Canada during the early 1980s) led to a temporary reduction in school enrollment but had no long-term impact on individuals’ educational attainment. Whether a similar scenario has persisted since the end of the 2008-2009 recession and the degree to which increased wages affect the long-term employability of lower-skilled youth are questions for future research.
Chosen excerpts by Job Market Monitor. Read the whole story at Wages, Youth Employment, and School Enrollment: Recent Evidence from Increases in World Oil Prices.