Center for Demography and Ecology University of Wisconsin-Madison The Role of Expectations in Adolescent Schooling Choices: Do Youths Respond to Economic Incentives?

We address the role of youths’ own choice-conditioned expectations in understanding their schooling choices by constructing a choice (or “switching”) model. We emphasize the effect of individual student perceptions regarding the “returns” associated with graduating from high school versus dropping out, while controlling for an extensive set of family and community factors. We find that youths’ expected income returns to graduating from high school are influential in their schooling choices, even when an extensive set of background, economic, family, and neighborhood variables, designed to capture the effects of parental and governmental decisions, is introduced into the analysis. Kathryn Wilson Associate Professor of Economics Kent State University Barbara Wolfe Professor of Economics, Population Health Sciences, and Public Affairs University of Wisconsin–Madison Robert Haveman John Bascom Emeritus Professor of Economics and Public Affairs University of Wisconsin–Madison The Role of Expectations in Adolescent Schooling Choices: Do Youths Respond to Economic Incentives? Over the postwar period, the level of education attained by individuals in nations of the Organisation for Economic Co-operation and Development (OECD) has increased steadily. This is especially true for the United States. In 1950, for example, the average American aged 25 or older had 9.3 years of education; by 2000, this had increased to 12.7 years. This increase reflects sizable increases in the rate of high school completion. In the cohort aged 16–24 in 1960, more than 27 percent were counted as high school dropouts; by 2001, the proportion of high school dropouts in this age cohort had fallen to 10.7 percent. Although the proportion of whites in any given age cohort who graduated high school has exceeded that for African-Americans over this period, this gap narrowed significantly during the 1970s and 1980s, and by 2000 had nearly closed. Observed trends in and patterns of educational attainment, human capital accumulation, and labor market success are determined by several factors. In addition to changes in a wide variety of background factors (such as ability, motivation, race, and gender), these involve decisions made by governments (as reflected in school resources and macroeconomic performance) and by parents (e.g., parental education, work effort, and child care time). Also relevant are the choices made by adolescents themselves in response to the net economic returns of the options open to them; in this paper we explore the schooling choices of youths in response to their perception of these returns. Economic and sociological research on the determinants of the schooling outcomes of youths is extensive and distinguished. These studies focus primarily on the family, 2 neighborhood, and peer group determinants of educational attainments, and are largely reducedform in nature. The role of youth preferences, and the choices made in response to the economic incentives and constraints that young people face, have not been systematically explored in these studies. Hence, their results may attribute to background and family characteristics effects properly attributed to differences in youths’ own choices in response to the incentives that they face. In this study, we address the role of youths’ own choice-conditioned expectations in understanding their schooling choices by constructing a choice (or “switching”) model. We emphasize the effect of individual student perceptions regarding the “returns” associated with graduating from high school versus dropping out, while controlling for an extensive set of family and community factors. Youths are presumed to form their expectations by referring to the outcomes of a slightly older cohort of individuals who have characteristics similar to their own. Because these expected income returns are choice-specific, we require estimates of each youth’s choice-conditioned expected returns, taken to be unobserved by the analyst but known by the youth. We focus on the high school graduation outcome for three reasons. First, individuals must complete high school in order to consider postsecondary schooling options. Hence, the decision to complete high school carries with it an option value benefit. Second, high school completion—the first schooling decision over which adolescents have some control—plays a crucial role in understanding the declining labor market position of low-skilled workers. Finally, our analysis of the high school graduation choice is nested within an extensive economic literature that addresses the determinants of this outcome.