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Cyclicality of Schooling: New Evidence from Unobserved Components Models

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Economic fluctuations play a critical role in investments in human capital. However, the cyclical properties of decisions on investment in human capital and how economic fluctuations shape these cycles remain largely unexplored. This is because we lack a direct measure of cycles in human capital investments. Such a measure would improve our understanding of the impact of economic cycles on human capital accumulation and shed light on: (1) the behaviour (pro-cyclical or counter-cyclical) of human capital investments and (2) their adjustments to changing economic conditions. These are pending questions for policy analysis, since different estimates of the cyclical fluctuations can lead to different policy recommendations.

We model human capital as a set of skills that increase through formal schooling, and look at enrolment ratios in the United Kingdom over time. Using a novel approach, we obtain and compare estimates of the cycles in schooling and in the economy. We provide an actual estimate of the cycle in the demand for education to closely analyze the whole spectrum of the co-movement of both cycles. This is crucial to improving our understanding of the behaviour of human capital investment decisions over time

We find evidence of a persistent cycle in human capital investments, which respond to different economic conditions in a largely time-varying way. Counter-cyclicality takes place during only two periods in our sample, the longest during the Great Recession. For the remainder of our sample, we find: (1) both pro-cyclical and a-cyclical behaviour and (2) that the degree of synchronization between human capital investments and the economic cycle seems to be time-varying as well. For large enough economic swings, the speed of adjustment is faster. Finally, we find evidence of a large influence of the economic cycle.