Aggregate unemployment decreases individual returns to education

Aggregate unemployment may affect individual returns to education through qualification-specific responses in participation and wage bargaining. This paper shows that an increase in regional unemployment by 1% decreases returns to education by 0.005 percentage points. This implies that higher skilled employees are better sheltered from labour market changes with respect to their jobs but they encounter larger wage changes than less skilled employees. We use representative individual data and panel variation in unemployment between German regions and employee groups. We demonstrate that our results are robust with respect to aggregation bias, time lags and potential endogeneity of the unemployment variable. (C) 2008 Elsevier Ltd. All rights reserved.