generation in the treated group could have enrolled in college at the same rate as the college enrollment in year 2006 (last year before the sanction) and had the average wage rates of workers in the treated industry observed in year 2006 (assuming they could have similar wage rates to their parents at corresponding ages). I compare these two cases using the population share of workers with high school diploma and college degree and their average real income at different ages in years 2006 and 2013 (for example, real Income<sup>_C_</sup> _age_ 30 _,_ 2006<sup>=93</sup><sup>_._6millionRialsandreal</sup> Income<sup>_C_</sup> _age_ 30 _,_ 2013<sup>= 61</sup><sup>_._6millionRials),Ifindthatwithoutthesanctionchildrencouldhavehada1.4trillionRials</sup> real lifetime income that will be only 824 million Rials as a result of sanction. Thus, this back of the envelope calculation shows a 41% reduction in children’s lifetime earnings.<sup>48</sup> It is also interesting to ask how large is the children’s income loss in economic terms? To assess the size of this loss, I compare it with earnings loss of the current workers due to the sanctions. My calculations suggest that a one-dollar reduction in parents’ permanent earnings leads to a subsequent reduction in children’s earnings of 1.2 dollars.<sup>49</sup> I also find that the costs to the society associated with the reduction in earnings after the implementation of the sanctions total about 18% of Iranian GDP over the years of sanctions. 45% of this reduction comes from decreased earnings for the current workers, and 55% comes from decreased earnings for the next generation. It suggests that the cost estimates using only the earnings of the current generation may only capture less than half of the overall cost.

There is, however, some potential drawbacks of this method. First, this procedure relies on the assumption that cohort effects on the earnings profile are minimal. Second, this simple calculation ignores individual characteristics that can affect children’s earnings.

# **5.2.2 Effect on Education Spending**

So far, I have looked at the educational attainment measured by the enrollment rates and years of education. Now, I examine the effect of the sanctions on investment in children’s education measured by household spending on education.<sup>50</sup> The education spending is the explicit costs associated with payments in cash such as (primary/secondary) school tuition, university tuition, books, private tutoring, donations, and other education expenditures (for instance extra classes). The average percentage of family educational spending was about 2% over the pre-sanction period (Source: Calculation by the author using HIES).<sup>51</sup> The primary/secondary school tuition fee constituted a significant proportion of total education costs (21%).

Table 3 presents the effect of the sanctions on education spending by items (they include zero for non-enrolled

> 48I also decompose the total effect of the sanctions on the children’s lifetime income into the sole effect of the reduction in education levels and the sole effect of the reduction in the wage rates. My calculation shows that under different scenarios the effect of reduction in education on the lifetime earnings is relatively smaller than that of the wage reduction.

> 49This effect is larger than previous studies. Oreopoulos et al. (2008) using Canadian data find that a one-dollar reduction in father’s permanent earnings due to a job loss leads to a subsequent reduction in his son’s earnings of 66 cents. One possible reason for this difference is that previous studies looked at cases that affect the lifetime income of the next generation only through a reduction in the education levels. In the case of Iran, the economic condition, e.g., wage rates have also changed after the sanctions. Moreover, as Grawe (2001) shows the intergenerational earnings mobility in the developing countries is larger because of the larger credit constraints.

> 50While the effect of high-quality education on the returns to schooling and economic growth is well known (Castelló-Climent and Hidalgo-Cabrillana (2012)), the effect on household spending on education is not documented in the current literature. Previous research has largely focused on children’s educational attainment.

> 51For Canada and the UK, the percentages were about 1.1 and 1.2%, respectively in 2009. Moreover, the average household expenditure on education as a percentage of total household income was 1.95 percent in the Unites States over 1990-1991 (Huston (1995)). For the 25 EU countries, the average private expenditure on education as a percentage of total household consumption during 1995-2004 is about 1% (range from 0.1 to 2.9%) (Lin and Lin (2012)). The share of education expenditure in household expenditure is 4.3% in India (Azam and Kingdon (2013)).

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