How are educational groups affected by economic shocks and trends?

Bjørnstad et al. (2010) forecast the future demand for labor by their educational attainment in Norway until 2030. The projection is based on a cyclical neutral development path in the key macroeconomic variables, in addition to several assumptions of structural character that are important in a longer perspective. In this report, we look closer at some of the assumptions made in Bjørnstad et al. (2010) and examine the consequences of changing these for the labor market by education.

A cyclically neutral development path is practical when the aim is to look into economic aspects in a longer perspective. The actual development is however characterized by various shocks hitting the economy with different strength all the time. The cyclical analysis in this report contains calculations of four such shocks that typically hit the Norwegian economy from time to time. These are, respectively, a setback in the international economy, a fall in Norwegian oil investments, a reduction in housing prices and a strengthening of the Norwegian currency.

In the long run analysis we have examined the consequences of changing some of the variables of importance in a longer perspective. We have looked at the effects of increasing the labor supply through both a higher growth in labor immigration and higher participation rates for the existing population. Further on, we have carried out calculations where the income tax and the value added tax is increased, respectively. Afterwards we have examined the effects of a worsening of the terms of trade conditions, i.e. that import prices increase more than export prices.

The results from the cyclical and the structural calculations by and large show the same pattern. On balance, persons with a low level of education are most likely to loose their job when the economic conditions worsen. Low-educated persons are to a larger extent employed in the private, exposed sectors of the economy and hence more vulnerable in a situation with falling employment. Consequently, persons with education below tertiary level are more likely to become unemployed in a cyclical downturn or when competitiveness worsens.

The results also show that persons with a low level of education have a looser attachment to the labor market and are more likely to exit the labor force as a response to rising unemployment. The results demonstrate large differences in the labor supply responses by educational level to changing unemployment levels. This phenomenon is in economic literature referred to as the discouraged workers effect and contributes to levelling out the unemployment discrepancies by education.

In all the long-term calculations, the budget balance is improved relative to the baseline in a longer perspective. This means that there is scope for a higher public expenditure growth in these calculations without violating the adopted fiscal policy rule. However, the calculations are partial in the sense that the fiscal policy does not respond to changes in the real economy. This may seem unrealistic, but is practical when the aim is to study consequences of various shocks and structural changes in isolation. In a separate calculation, we have increased the public employment level. By comparing this calculation with the other long-term calculations, one can form an impression of the total implications of the structural changes when the public authorities respond by increasing the employment level. The results from this calculation show that increasing the public employment level primarily benefits persons with a high level of education, as public sector employs a large share of highly educated persons.

The calculation where public employment is increased is useful as a supplement to the cyclical analyses as well. By comparing it to the cyclical calculations, we can consider a joint shock as indicating a fiscal policy response to business fluctuations. A set back in the private economy will generally hit low skilled workers harder, and increased public employment will typically benefit the highly educated workers. Hence, it will be a challenge to aim the fiscal policy stimulus such that it benefits the educational groups that need it the most.