Discussion paper
DP19066 Transitory Earnings Opportunities and Educational Scarring of Men
I study how transitory increases in the opportunity cost of schooling affect dropout rates and long-run outcomes. Exploiting a tax-free year in Iceland and comparing teenagers around compulsory schooling age, I document increased dropout rates and a permanent loss in educational attainment for men, but not women. Consequently, they experience substantial lifetime earnings losses, enter occupations with limited career advancement, and have reduced marriage and fertility. Dropouts predominantly come from low-education—but not low-income—families and neighborhoods, consistent with misperceptions about the returns to education. The findings suggest that temporary economic booms can permanently reduce aggregate human capital accumulation.
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