This paper studies how labor market conditions around high school graduation affect postsecondary skill investments. Using administrative data on more than six million German graduates from 1995-2018, and exploiting deviations from secular state-specific trends, I document procyclical college enrollment. Cyclical increases in unemployment reduce enrollment at traditional universities and shift graduates toward vocational colleges and apprenticeships. These effects translate into educational attainment. Using large-scale survey data, I identify changes in expected returns to different degrees as the main mechanism. During recessions, graduates expect lower returns to an academic degree, while expected returns to a vocational degree are stable.

Typical of the European context large quality differences have existed across fields rather than German universities historically. We use a student choice model to show how this feature may generate information frictions, resulting in inefficient matching and welfare losses to the present day. A key theoretical result is that higher average distances between high schools and colleges of freshmen indicate better matching at the market level. In a second step, we combine an ordinal tier ranking published by the German newspaper ``Die Zeit’’, which in a staggered way increased readily available information on field-specific quality, with X cohorts of register data on freshmen. Difference-in-differences estimates that exploit field-specific information shocks within universities over time show that a top-tier ranking increases the distance students travel to a program by 7%. To quantify the implied welfare gains from this improved matching, in a third step, we show that graduates from top-tier programs have over 14% higher earnings in their first job. We moreover examine empirically implications for inequality and Germany’s lost potential.

We study the wage effects of the German Excellence Initiative, a federal university funding and reputation program launched in 2006/07. Using graduate survey data for the 2001, 2005, and 2009 cohorts and a standard difference-in-differences design, we compare labor market entry wages of graduates from newly designated elite universities to those from other institutions. Preliminary results show large wage premia one year after graduation. Due to the unforeseen nature of the program, we find no evidence of affected cohorts into elite universities. This suggests that a considerable share of the wage premium may be explained by pure signaling effects.