The business cycle human capital accumulation nexus and its effect on hours worked volatility

Abstract

This paper studies hours worked volatility and the cyclicality of human capital investments by embedding a Ben-Porath life-cycle model of human capital accumulation into an RBC setting. Agents differ across two dimensions: age and productivity in learning. Our results show that individuals invest more in human capital during economic downturns. However, human capital accumulation is more counter-cyclical for young and low-productivity individuals because they face a lower opportunity cost of education and a higher marginal product of human capital. These results are confirmed empirically using US data from the Current Population Survey and the American Time Use Survey. In addition, the paper contributes to the RBC literature by showing that the model's business cycle properties, in particular hours worked volatility, are sensitive to assumptions of heterogeneity. Introducing heterogeneity in productivity increases the volatility of aggregate hours worked and changes the life-cycle profile for hours volatility to better match the data.

The Unequal Opportunity For Skills Acquisition During The Great Recession In Europe

“…Alessandrini et al, 2015;Méndez and Sepúlveda, 2012;Heylen and Pozzi, 2007;Dellas and Sakellaris, 2003;DeJong and Ingram, 2001;Betts and McFarland, 1995). However, our estimates for Europe are substantially lower than the estimates for the United States.…”

“…In summary, our results suggest that, as a consequence of bad labor market conditions during the period of the Great Recession, more young Europeans decided to enrol in education. This finding is consistent with the literature documenting that schooling decisions are counter‐cyclical (Alessandrini et al ., 2015; Méndez and Sepúlveda, 2012; Heylen and Pozzi, 2007; Dellas and Sakellaris, 2003; DeJong and Ingram, 2001; Betts and McFarland, 1995). However, our estimates for Europe (of between 0.23 and 0.37 per 1 percentage point increase in the unemployment rate) are substantially lower than those for the United States.…”

“…Empirical evidence on the effect of crises on schooling decisions is scant (particularly in the case of Europe) and ambiguous (mostly based on single‐country case studies). The majority of papers find a counter‐cyclical relationship: when the economy enters a period of recession (and the unemployment rate rises), school attendance and enrolment increase (see, among others, Alessandrini et al ., 2015; Long, 2015; Méndez and Sepúlveda, 2012; Heylen and Pozzi, 2007; Dellas and Sakellaris, 2003; Dellas and Koubi, 2003; Mattila, 1982; and references therein). Fewer studies find a pro‐cyclical relationship (King and Sweetman, 2002; Rucci, 2003; Edwards, 1976); and yet another group of papers finds no association at all (Kane, 1994; Polzin, 1984).…”

Progressive Taxation and Economic Stability*

“…Recessions tend to reduce the opportunity cost of human capital accumulation, which encourages individuals to allocate more time to learning activities. As one may expect, this counter-cyclicality is mainly driven by young people (Alessandrini et al, 2015). Thus, modelling human capital endogenously is important to capture the cyclicality of time allocation decisions made by young individuals.…”

The Effects of Macroeconomic Conditions at Graduation on Overeducation

“…Recessions have also been linked to the decision to enrol in post‐secondary education (Alessandrini, Kosempel, and Stengos ; Betts and McFarland ; Dellas and Sakellaris ). Although this is an interesting issue, it is beyond the focus of this study.…”