Family Resources and Human Capital in Economic Downturns

I study how recessions impact the human capital of young adults and how these effects vary over the parent income gradient. Using a novel confidential linked survey dataset from U.S. Census, I document that the negative effects of worse local unemployment shocks on educational attainment are strongly concentrated among middle-class children, with losses in parental home equity being potentially important mechanisms. To probe the aggregate implications of these findings and assess policy implications, I develop a model of selection into college and life-cycle earnings that comprises endogenous parental transfers for education, multiple schooling options, and uncertainty in post-graduation employment outcomes. Simulating a recession in the model produces a “hollowing out the middle” in lifecycle earnings in the aggregate, and educational borrowing constraints play a key role in this result. Counterfactual policies to expand college access in response to the recession can mitigate these effects but struggle to be cost effective.