Transitory Earnings Opportunities and Educational Scarring of Men

I study how transitory increases in the opportunity cost of schooling affect dropout rates and long-run outcomes. Exploiting a tax-free year in Iceland and comparing teenagers around compulsory schooling age, I find increased school dropout and a permanent loss in educational attainment for men, but not women. Consequently, men suffer substantial losses in lifetime earnings, slow career progression, and reduced marriage and fertility outcomes. Dropouts predominantly come from low-education neighborhoods and enter jobs with limited career prospects, consistent with misperceptions about the returns to education. I discuss the implications for the cost of business cycles, education policy, and age-dependent taxation.