Stratified Scars: Social inequality in the labor market consequences of upper secondary dropout

While the association between upper secondary dropout and negative labor market consequences is well-documented, the causal link and the social stratification in this effect are less clear. Using geo-referenced administrative data from Germany and a conditional instrumental variable approach that exploits distances between place of residence and large firms, we find negative income consequences for dropping out of vocational training but show that the penalty is entirely concentrated among individuals from disadvantaged backgrounds. We further show that these stratified scars partially reflect unequal vocational re-enrolment rates and unequal employment outcomes among dropouts who do not re-enroll. Our results indicate a great potential of policies targeting higher graduation rates to reduce social inequality in labor markets. Furthermore, our study suggests that social origins are important moderators of linkage strength between school and work even in institutional settings with strong links between credentials and the labor market.