Is Education a Safety Rope? A Longitudinal Study of Inter-generational Consequences of Temporal Shocks on Mexican Families

Abstract

This paper studies long term implications of temporary macroeconomic shocks with the aim to identify welfare effects to certain groups of the society. We focused on the impact to education attainment given its relevance in determining permanent income and wealth, and the availability of a unique panel dataset of Mexican households and historical GDP variation. Based on the identification assumption that macroeconomic shocks are exogenous to individuals decisions to pursue education and a complex data construction, we found that there is indeed a strong correlation between economic shocks and years of education for all school periods and cohorts born between 1950 and 1990, with differentiated magnitude depending on the shock’s timing. GDP contractions are related to an average reduction of around 0.053 years of education if the shock is realized during secondary education, but its potential negative effect is about 0.165 years of schooling less if the negative shock is experienced when the individual was enrolled in college. Our exploration suggests that opportunity cost is the main driver of the decision to drop out of school when the economy experiences sudden temporary shocks. This distinction has important policy implications since decisions to drop out of school are made mostly by the student as they grow older, pointing out the need to develop policies targeted to students in junior high and higher levels during economic shocks in order to reduce the drop out rate.