Weathering the Great Recession With Human Capital? Evidence on Labor Market Returns to Education From Arkansas

Abstract

The Great Recession was one of the sharpest economic downturns of the past century, with significant impacts across the U.S. labor market. Over past decades, one key feature of the U.S. labor market has been the high and stable returns to education. In this paper I estimate the returns to education for large samples of young workers in Arkansas over the period before, during, and after the Great Recession. I use linked education and Unemployment Insurance earnings data on almost 1 million individuals within the state. From both cross-sectional and longitudinal analysis, I find very modest effects of the Great Recession on the earnings gaps of workers with different levels of education. Over the period 2001 to 2012, there were large and stable returns to postsecondary education relative to high school completion, and these gaps were largely unaffected by the Great Recession. I do find employment shocks that differ by education level: for persons without a college education, employment shocks were stronger and they persisted beyond the end of the recession. Adjusting for these employment shocks, earnings gaps by education level increased over the period after 2007. I also find evidence that those who graduated from college during the Great Recession gained less than those who graduated before 2007. As with earlier recessions, postsecondary education served as an effective buffer against labor market shocks.