A small number of studies have examined the impact of local labor market conditions (unemployment) on school dropout rates. However, none of them have considered the role of the employment structure (skilled vs. non-skilled). In Spain, there exist a high degree of regional heterogeneity in both the type of employment and the school dropout behavior. In this paper we stablish a link between these two phenomena. We construct data for a panel of Spanish regions and identify the effect of local labor (regional) markets using the variation in the share of employment by industry and gender across regions and over time. In contrast with the previous literature, we use a model with regional fixed effects and regionspecific slopes, which allows us to control for not only for time-constant, but also for time-varying unobserved heterogeneity across regions. We show that, respect to models than only include the commonly used region fixed-effects, estimated effects of the employment variables vary substantially if we also include regionspecific slopes. We find a sizable impact of the employment structure and observe that, in markets with a larger share of low-skill employment, the school dropout rate is significantly larger, though the industries affecting boys and girls are different. Our results suggest that the supply of skilled employment in the economy may allow an important share of school dropouts to be kept in school.