College Tuition, Public Finance and New Business Starts

A growing public discourse cites the rising cost of education and student debt overhang as a contributor to slow economic growth. A parallel discussion explores the causes of the secular decline in business dynamism and entrepreneurship rates in the United States over the past several decades. This study is an attempt to connect these two narratives. I provide early evidence that the growth of public university tuition over the previous two decades is negatively associated with movement into self-employment. Because labor market and education decisions are often made together, I focus on shocks to in-state tuition among parents of near-college-age children, who may internalize the cost of their children’s education but are less likely to be attending college themselves. Using state budget surpluses and shortfalls as an instrument for in-state tuition in a triple-difference framework, I find that a 10% increase in the average price of in-state tuition is associated with a 13.9% decrease in new business starts of parents with college-age children in the CPS, relative to both non-parents and parents of younger children. A one percentage-point increase in the growth rate of in-state tuition is associated with a 3.8% decline in new firm births. The effect is similar in size and significance when aggregating to the household level and when including a standard battery of covariates. The instrument is orthogonal to private school tuition rates, and the effects are stronger for households with more children and those with children closest to college age. Taken together, the results indicate that the rising cost of higher education may be partially responsible for the decline in new business starts in the United States.