15 May 2020

Going Back to School Takes Time: Evidence from a Negative Trade Shock

Economic shock events have long-lasting effects. A person who loses their job due to a crisis takes three to four years to decide to go back to school to obtain a higher qualification. This is the result of a study that evaluated the behavior of Canadian forest workers in the wake of the US subprime mortgage crisis. Another result of the study was a call for politicians to simplify the process for re-enrolling in school.

Key issue

Business cycles affect the opportunity cost of investing in education. The literature investigating the impact of labor demand shocks on educational choices has mainly focused on positive shocks; however, our paper evaluates the effect of a negative trade shock on workers’ labor market outcomes and educational choices.

Approach and methodology

We explore the Canadian lumber exports crisis beginning in 2007 in a quasi-experimental design. Between 2007 and 2009, the subprime mortgage crisis caused a substantial slowdown in the US housing market, including in the construction sector. This led to a sudden drop in Canadian exports of lumber to the US. We use this shock as a natural experiment to estimate the propensity of forestry workers to work part-time vs full-time, become unemployed or inactive, and return to school. We show that outcome adjustments may vary over time.

Key findings and conclusions

Our main results suggest that the probability of forestry workers’ being employed decreased by 4.1 percentage points, in addition to an overall decrease of 8.6 percentage points for workers in the primary and secondary sectors. This more severe shock translated into a higher probability of being unemployed or inactive.

Intuitively, one would expect younger forestry workers to return to school in such circumstances. But during the first two years following the crisis, they did not do so. However, we find that after three to four years, education enrollment increased by 2.5 percentage points. This confirms the idea that adjustments toward an increase in education enrollment are gradual, as it is easier to drop out than to enroll.

This finding, which is mainly driven by young males’ behavior, has some potentially important policy implications. Knowing that young males return to school when deprived of a valuable outside option on the job market, but that they take time to adjust, may be key to designing policies that work for them.