Israel's Compulsory Education Law was amended several times in the 1970s, changes that were reflected in an increase in the number of years of both compulsory education and free education. This process caused a significant reduction in the school dropout rate among students from ninth to twelfth grades, principally among Sephardic (Oriental) Jews (Jews of Asian or North-African origin) and the non-Jewish population. The fact that compulsory schooling and free schooling were dealt with separately during these years makes it possible to examine what effective constraint deters some individuals from continuing their studies. To examine this question, I compared the "compulsory effect" to the "free effect" on the duration of studies and the return to education derived from each of these amendments. It was found that the extra years of compulsory schooling caused a steep fall in the dropout rate in the ninth and tenth grades that had been included in the provisions of the Law, and a moderate decline in dropout rates in the following grades (eleventh and twelfth), which were not compulsory or free at that time. The introduction of free education in the eleventh and twelfth grades also contributed to reducing dropout rates, mostly among female students. It was also found that the return in terms of salary derived from the added years of compulsory education did not differ from the return derived from the added years of free education, and that they both resembled the return to the years of high-school education estimated using the OLS method. These findings indicate that a liquidity constraint deters some individuals from making an optimal investment in their human capital. According to the findings, this constraint is not only due to the need to pay tuition, but also apparently derives from the family decision-making framework, which does not necessarily take into account the benefit that the individual will derive from acquiring additional education.

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