Inflation and Human Capital Investment Decisions

This study investigates the impact of inflation on human capital investment decisions. Using a specially designed survey we estimate the causal effect of recent price level increases on the graduation plans of over 1,200 U.S. university students. We find that inflation caused over half of the respondents to alter their plans, with nearly 60 percent of these opting to accumulate less human capital and the remainder increasing their human capital by taking additional courses or pursuing double majors or advanced degrees. A comparison of empirical treatment estimates to predictions derived from our theoretical framework reveals that inflation-driven higher direct costs reduced human capital investments, particularly among those for whom inflation had reduced their ability to pay bills. Conversely, while some students merely postponed graduation because they believed inflation would not persist, higher inflation-induced uncertainty in the post-graduation labor market generally caused greater human capital accumulation, especially among economically vulnerable students and those whose confidence in finding a job after graduation had declined. The study concludes with policy implications, contributing new insights into how macroeconomic shocks affect educational choices.