The Cyclicality of Enrollment in Tertiary Education

This paper aims at analyzing the cyclicality of enrollment in tertiary education by exploiting variation in student flows across countries. For this purpose, we investigate the relationship between the enrollment of foreign students and the business cycle in their country of origin in a country-pair panel dataset, spanning the years from 1999 to 2012. While we do not find a clear pattern of cyclicality for the sample as a whole, we argue that this is due to heterogeneity across countries and examine this possibility by allowing for different degrees of cyclicality in certain sub-samples. In line with previous results in the literature, we find that there is a significant difference in the cyclicality of tertiary enrollment between OECD and non-OECD countries. By splitting the sample with respect to the initial values of GDP per capita, years of schooling, and the index of institutionalized democracy, we are able to confirm the notion that more developed countries tend to have more countercyclical enrollment, even though our analysis is not suited to explain which specific factors are driving these differences. Moreover, we find that countries with a higher level of inequality tend to exhibit more procyclical enrollment, an insight that is in line with theoretical models of human capital accumulation based on credit constraints. Finally, we test for the importance of credit constraints by exploiting variation in both the real effective exchange rate and the ratio of domestic credit to the private sector over GDP. Our results confirm the relevance of credit constraints in shaping the pattern of cyclicality and are shown to be robust to the use of different data sources.