Abstract

Although it is well established that dropping out of upper secondary education is associated with worse labor market outcomes, it is less clear whether dropout has a causal effect on income development or whether the consequences of dropout differ by social origin. Using geo-referenced administrative data from Germany and a conditional instrumental variable approach that exploits distances between residences and large firms, we establish this causal relationship and show that the dropout penalty is entirely concentrated among individuals from disadvantaged backgrounds. These stratified scars emerge from both unequal educational re-enrolment rates and unequal employment outcomes among dropouts who do not re-enroll. Our results indicate a great potential of policies targeting graduation to reduce social inequality in labor markets. Furthermore, our study suggests that social origins appear to be important moderators of linkage strength between school and work even in institutional settings with strong links between credentials and the labor market.