Industry boom can reduce returns to high school completion

It is widely believed that industry boom will increase returns to education and thus increasing investment in attaining education. This assertion assumes that education is required to get jobs generated due to the industry boom. A new paper by Prof. Cascio and Ayushi Narayan of Dartmouth College illustrate that this assumption needn't be true always.

Oil and natural gas extraction has increased in the last decade in US due to the advent of new technology called fracking. This produced lots of jobs, 6 lakh by an estimate, most of them being relatively good paying unskilled jobs, which don't need education. This increased the opportunity cost of continuing in school, it made sense for people to drop out and earn money instead of being in school. It impacted the educational attainment and dropout rates in these areas.
We explore the educational response to fracking, taking advantage of the timing of its widespread introduction and the spatial variation in shale oil and gas reserves. We show that local labor demand shocks from fracking have been biased toward low-skilled labor and males, reducing the return to high school completion among men. We also show that fracking has increased high school dropout rates of male teens, both overall and relative to females

This can possibly happen due the combination of four factors. One, when the schools aren't value adding, at least as perceived. Two, when there are economic pressures in the family of child to earn money. Three, there are easily available jobs which don't need education. Four, when the investment required on education in terms of time and thus the money, to be able to attain a job is high.


This is relevant to India because India satisfies all these conditions to an extent except the third. We are hoping that manufacturing would do that. The learning outcomes of public schools where majority students study and those of some private schools are low; they aren't perceived to be value adding. Poverty creates pressures forcing students to take up jobs. Due to the service led growth, only those who had at least a +2 or graduation degree had a chance to be part of the formal employment. This means an increase in the time to be invested on education which isn't affordable to some poor.

This paper by Prof. Fulford illustrates the dynamics of returns to education in India. It says 
The increase in education has produced disappointingly small increases in household consumption. The reason appears to be that very few men and hardly any women are in salary employment where the value of extra education is high.
...most Indians still work in various forms of self-employment or home production where the value of extra education is less obvious. Looking only at those who work for wages, better educated groups of males earn substantially more than less educated groups. Most of the returns to education seem to be coming from those who have a regular salary, not from those in the casual labour market. 
So a large part of the reason that the overall return to education is so low for men is that the one area where there are high returns to education — salary employment — absorbs only 20% of working-age men. Similarly, because so few women are employed for a regular salary, we see even lower returns to education for women. Put a different way, the reason education does not have high returns is because so few Indians work in areas where education is likely to be valuable.
We have a situation where the investments needed to be part of the formal employment process are high, which isn't affordable to some people. At the same time, there aren't many opportunities for those who complete high school. This can increase the perception of reduced returns of high school education. It is hoped that manufacturing jobs can absorb these people. If this happens without increasing the quality of school education and returns to higher education, more people might prefer low-skilled jobs and we might also experience the effects similar to that of US shared in the paper, reduced returns to high school education and increased high school drop out rates.

Is this a matter of concern? It depends on the type of jobs being generated. If the jobs generated are fairly permanent, not in terms of a permanent employment but jobs with long term prospects or if it takes at least one generation for these skills to become obsolete, then it can be beneficial. People who take up these jobs would continue working for significant time. With stable incomes, they can make long term investments in their children's education which hopefully moves them up the economic ladder. This would also incentivize people to migrate to places closer to industries and urban areas where there is better access of educational and health facilities.

Instead, if the jobs produced in local economies are temporary and fade off after few years, households might have earned income during the period but they wouldn't have attained education if they had dropped out of school. This can trap them in a complex situation where they find it difficult to come back to school and the skills attained by them in one industry aren't transferable to other industry. However, this doesn't mean these industries shouldn't be desired or be obstructed. It is relatively better than the current situation.

All this should drive our attention to two aspects. One, the importance of quality school education which equips students with capability to learn skills quickly and adapt to the changing nature of jobs. Two, not to just focus only on the manufacturing sector. While it is important, doing forced manufacturing ignoring others can make even capable people stuck at the middle of the economic ladder, again due to the phenomenon described above.

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