Tight Labor Markets and the Demand for Education: Evidence from the Coal Boom and Bust

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Human capital theory predicts that individuals acquire less schooling when the returns to schooling are small. To test this theory, the authors study the effect of the Appalachian coal boom on high school enrollments. During the 1970s, a boom in the coal industry increased the earnings of high school dropouts relative to those of graduates. During the 1980s, the boom subsided and the earnings of dropouts declined relative to those of graduates. The authors find that high school enrollment rates in Kentucky and Pennsylvania declined considerably in the 1970s and increased in the 1980s in coal-producing counties relative to counties without coal. The estimates indicate that a long-term 10% increase in the earnings of low-skilled workers could decrease high school enrollment rates by as much as 5–7%—a finding with implications for policies aimed at improving low-skilled workers' employment and earnings, such as wage subsidies and minimum wage increases.