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The graduate tax when education is a signal

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  • Ismail, Russayani
  • Myles, Gareth D.

Abstract

This paper investigates the effects of a graduate tax when the return to education is uncertain and wages are determined through equilibrium in a labor market with signalling. The consequence of uncertainty is that both ability and initial wealth matter for educational choice. Compared to a constrained first-best the market outcome with uncertainty and signalling results in an inefficiently high number of people entering higher education. Due to the positive wealth effect over-entry is proportionately greater for high-wealth individuals. The graduate tax reduces entry into education so enhances efficiency. However, it has undesirable distributional consequences: low-wealth individuals are deterred from entering education but high-wealth are encouraged. In this respect, the graduate tax has clear failings as a method of financing higher education.

Suggested Citation

  • Ismail, Russayani & Myles, Gareth D., 2016. "The graduate tax when education is a signal," Research in Economics, Elsevier, vol. 70(1), pages 24-37.
    • Handle: RePEc:eee:reecon:v:70:y:2016:i:1:p:24-37
    DOI: 10.1016/j.rie.2015.07.008
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    References listed on IDEAS

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    1. Eaton, Jonathan & Rosen, Harvey S, 1980. "Taxation, Human Capital, and Uncertainty," American Economic Review, American Economic Association, vol. 70(4), pages 705-715, September.
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    3. Levhari, David & Weiss, Yoram, 1974. "The Effect of Risk on the Investment in Human Capital," American Economic Review, American Economic Association, vol. 64(6), pages 950-963, December.
    4. Snow, Arthur & Warren, Ronald S, Jr, 1990. "Human Capital Investment and Labor Supply under Uncertainty," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 31(1), pages 195-206, February.
    5. Kodde, David A, 1986. "Uncertainty and the Demand for Education," The Review of Economics and Statistics, MIT Press, vol. 68(3), pages 460-467, August.
    6. Yoram Ben-Porath, 1967. "The Production of Human Capital and the Life Cycle of Earnings," Journal of Political Economy, University of Chicago Press, vol. 75, pages 352-352.
    7. Michael Spence, 1973. "Job Market Signaling," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 87(3), pages 355-374.
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Graduate taxes, not student loans, for Ireland
      by brianmlucey in Brian M. Lucey on 2016-08-01 10:33:23

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