Is the fracking boom causing a dropout boom?

For 29 years now, Paul Solman’s reports on the NewsHour have been trying to make sense of economic news and research for a general audience. Since 2007, our Making Sen$e page has vowed to do the same, turning to leading academics and thinkers in the fields of business and economics to help explain what’s interesting and relevant about their work. That includes reports and interviews with economists affiliated with the esteemed National Bureau of Economic Research.

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Founded in 1920, NBER is a private nonprofit research organization devoted to objective study of the American economy in all its dazzling diversity, combining data with rigorous analysis to describe and explain the material world in which we live long before data analytics became fashionable. “Why Some Women Try to Have It All: New Research on Like Mother Like Daughter” and “Why Does the First Child Get the Gold? An Economics Answer” have been among our most popular posts on Making Sen$e, both of them largely based on NBER research. We thought our readership might benefit from a closer relationship.

Each month, the NBER Digest summarizes several recent NBER working papers. These papers have not been peer-reviewed, but are circulated by their authors for comment and discussion. With the NBER’s blessing, Making Sen$e is pleased to begin featuring these summaries regularly on our page.

The following summary was written by the NBER and doesn’t necessarily reflect the views of Making Sen$e. We will tell you, however, what the takeaway is: The fracking boom has increased demand for low-skilled workers, raising local incomes and increasing the high school dropout rates among male teens.

A defining feature of the U.S. labor market since the 1970s has been a rising premium for skill. The disparity between the wages of high- and low-skilled workers has increased in part because the economy has evolved in a way that has raised the relative demand for high-skilled workers. But over the past decade, the advent of horizontal drilling and hydraulic fracturing has fueled a structural transformation of some local economies. In locations as diverse as North Dakota, Pennsylvania and Texas, these technologies have sharply increased the demand for low-skilled workers.

NBER 9.18.2015

In “Who Needs a Fracking Education? The Educational Response to Low-Skill Biased Technological Change” (NBER Working Paper No. 21359), Elizabeth U. Cascio and Ayushi Narayan find that the new extraction technologies have raised local incomes, especially for low-skilled workers, while also increasing high school dropout rates among male teens. They take advantage of the timing of fracking’s widespread introduction and of variation in shale oil and gas reserves across locations to document a correspondence between the rising dropout rate and the higher wages available to dropouts.

The authors find that local labor demand shocks from fracking have been biased toward low-skilled workers and toward men, reducing the male return to high school completion. This lends empirical support to the notion that fracking represents low-skill biased technological change. They also find that fracking has increased the high school dropout rates of male teens, but not of female teens. Absent fracking, they estimate that the male-female gap in high school dropout rates among 17- to 18-year-olds in the average area with fracking would have narrowed by about 11 percent between 2000 and 2013. Instead, it was unchanged.

The findings imply that there may be long-lived labor market consequences associated with energy-related economic booms. The decision to drop out of school could well be a rational one in the face of increases in the relative wages of low-skilled workers. Nevertheless, the authors suggest that some students could be making a mistake by putting too much weight on the present and that this may have implications for future productivity and the social safety net. By the end of their data sample, in 2013, even though the price of oil remained high, the labor demand from fracking also no longer appeared to favor dropouts. This suggests the possibility that the relatively large income benefits of fracking for high school dropouts were only temporary. Further work is needed to explore potential differences in the impact of skill-biased technological change on wage differentials and educational decisions at other points in the skill distribution.

— Les Picker, National Bureau of Economic Research