Spain’s housing boom of the 2000s is usually remembered for rapidly rising home prices, an expanding construction sector, and the severe recession that followed. But the boom also changed an important decision facing several cohorts of young people: whether to pursue higher education or enter the labor market.

In her paper, “Human Capital Accumulation and the Long-Term Effects of Temporary Sectoral Shocks,” Ekaterina Gurkova (Professor at Paris School of Economics and UCLA Ph.D. graduate) studies how temporary sectoral booms influence young workers’ education and employment choices and, through those choices, affect the economy long after the boom has ended.

Between 1995 and 2007, Spain experienced an extraordinary expansion of construction and related industries. Employment opportunities grew rapidly, particularly in sectors that hired workers without a college education. For young adults completing mandatory schooling, these opportunities increased the immediate payoff from working and raised the opportunity cost of pursuing higher education.

During the same period, enrollment in tertiary education among 16- to 20-year-olds declined sharply. Gurkova shows that this decline was closely connected to the construction boom: Spanish regions with the largest increases in construction employment also experienced the largest decreases in higher education enrollment. Moreover, many of the young people drawn into the labor market during the boom did not return to school after construction activity collapsed in 2008. As a result, a temporary increase in labor demand permanently reduced educational attainment among several cohorts.

Could these individual decisions help explain Spain’s prolonged slowdown in labor productivity? To answer this question, Gurkova develops a quantitative model in which workers decide whether to acquire higher education and which sector to enter over the course of their lives. Workers accumulate skills that are partly specific to their sector, making it increasingly costly to change industries later in life.

The results show that a temporary construction boom can reduce aggregate productivity for nearly 50 years, generating an average productivity loss of approximately 0.8 percent during the transition. Initially, productivity declines because the affected cohorts enter the economy with less education and concentrate in sectors with weaker human-capital spillovers. Over time, limited worker mobility becomes the main source of persistence: after accumulating sector-specific experience, workers find it costly to move into other industries, slowing the economy’s adjustment after the construction boom ends.

The boom also has important distributional effects across generations. Workers who enter the labor market during the expansion may benefit from unusually strong employment opportunities. Later cohorts, however, can experience lower lifetime earnings even though they enter the labor market after the original boom has ended. The slow reallocation of workers across sectors creates labor-market congestion and keeps wages depressed during the transition.

The findings show how even a positive temporary demand shock can have lasting negative consequences for the aggregate economy. A boom may create valuable opportunities for workers in the short run while reducing educational attainment and slowing economic adjustment in the long run. This does not imply that governments should prevent workers from taking advantage of employment opportunities during a boom. Instead, policymakers should account for the lasting educational and labor-market consequences of temporary demand shocks.

 

The full paper can be found [here].