Thursday, May 22, 2008

Is education recession insurance?

The CUNY Chancellor states that college experience is "recession insurance" because folks with some college experience are less likely to be unemployed than those without.

I think this observation is based on cross-sectional data: You survey everyone at a point in time, and it turns out that those with more education are less likely to be unemployed.

But that's not really the answer to the relevant question here, which is if you have more education, does that provide protection from becoming unemployed at some future date? Does education lower the probability of becoming rather than being unemployed?

What's the difference between these concepts? Economists categorize unemployment by three types of cause: cyclical, structural, and frictional. The first is what we mean when we talk about a recession. The second and third refer to underlying disincentives or other impediments to working, which are relatively low in the U.S., and the normal churn in a job market where millions of jobs are created and destroyed each year.

It is easy to imagine how education might insulate you against any combination of these three causes, and how it may not insulate against any particular one. Recent research in macroeconomics has identified the difficulty of finding a job as the key motive force behind rising cyclical unemployment during recessions, and not increased layoffs or quits. One would expect that more education should improve the chances of being newly hired, but I'm not sure that's true.