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Educational opportunity and income inequality

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  • Igal Hendel
  • Joel Shapiro
  • Paul Willen

Abstract

Affordable higher education is, and has been, a key element of social policy in the United States with broad bipartisan support. Financial aid has substantially increased the number of people who complete university—generally thought to be a good thing. We show, however, that making education more affordable can increase income inequality. The mechanism that drives our results is a combination of credit constraints and the ‘signaling’ role of education first explored by Spence (1973). When borrowing for education is difficult, lack of a college education could mean that one is either of low ability or of high ability but with low financial resources. When government programs make borrowing easier or tuition more affordable, high-ability persons become educated and leave the uneducated pool, driving down the wage for unskilled workers and raising the skill premium.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Boston in its series Public Policy Discussion Paper with number 04-5.

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Date of creation: 2004
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Handle: RePEc:fip:fedbpp:04-5

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Keywords: Education - Economic aspects ; Income distribution;

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Citations

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Cited by:
  1. Anil Duman, 2008. "Education and Income Inequality in Turkey: Does Schooling Matter?," Financial Theory and Practice, Institute of Public Finance, vol. 32(3), pages 369-385.
  2. Rafal Kierzenkowski & Isabell Koske, 2012. "Less Income Inequality and More Growth – Are they Compatible? Part 8. The Drivers of Labour Income Inequality – A Literature Review," OECD Economics Department Working Papers 931, OECD Publishing.
  3. Yuki, Kazuhiro, 2009. "Education, Signaling, and Wage Inequality in a Dynamic Economy," MPRA Paper 16982, University Library of Munich, Germany.
  4. Lam, Kit-Chun & Liu, Pak-Wai, 2011. "Increasing dispersion of skills and rising earnings inequality," Journal of Comparative Economics, Elsevier, vol. 39(1), pages 82-91, March.
  5. Toshiki Tamai, 2009. "Inequality, unemployment, and endogenous growth in a political economy with a minimum wage," Journal of Economics, Springer, vol. 97(3), pages 217-232, July.
  6. Bednar, Steven & Gicheva, Dora, 2013. "Tax Benefits for Graduate Education: Incentives for Whom?," Working Papers 13-17, University of North Carolina at Greensboro, Department of Economics.
  7. Ning, Guangjie, 2010. "Can educational expansion improve income inequality? Evidences from the CHNS 1997 and 2006 data," Economic Systems, Elsevier, vol. 34(4), pages 397-412, December.
  8. Robert Dur, 2006. "Status-Seeking in Violent Subcultures and the Double Dividend of Zero-Tolerance," Tinbergen Institute Discussion Papers 06-005/1, Tinbergen Institute.
  9. Ordine, Patrizia & Rose, Giuseppe, 2011. "Inefficient self-selection into education and wage inequality," Economics of Education Review, Elsevier, vol. 30(4), pages 582-597, August.
  10. Rose, Giuseppe, 2013. "Endogenous ranking in a two-sector urn-ball matching process," Economics Discussion Papers 2013-40, Kiel Institute for the World Economy.
  11. Patricia Crifo, 2008. "Skill Supply and Biased technical change," Post-Print hal-00243031, HAL.
  12. Marcello D'Amato & Dilip Mookherjee, 2012. "Educational Signaling, Credit Constraints and Inequality Dynamics," CSEF Working Papers 311, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
  13. Theodore Koutmeridis, 2013. "The Market for "Rough Diamonds": Information, Finance and Wage Inequality," CDMA Working Paper Series 201307, Centre for Dynamic Macroeconomic Analysis, revised 14 Oct 2013.
  14. Theodore Koutmeridis, 2013. "The Market for "Rough Diamonds": Information, Finance and Wage Inequality," Discussion Paper Series, Department of Economics 201307, Department of Economics, University of St. Andrews, revised 14 Oct 2013.
  15. Dean Corbae' & Tzu-Ying Chen, 2010. "Can Credit Market Signalling Improve Labor Market Outcomes?," 2010 Meeting Papers 685, Society for Economic Dynamics.
  16. David A. Green, 2007. "A Cautionary Discussion about Relying on Human Capital Policy to Meet Redistributive Goals," Canadian Public Policy, University of Toronto Press, vol. 33(4), pages 397-418, December.
  17. Heshmati, Almas & Kim, Jungsuk, 2014. "A Survey of the Role of Fiscal Policy in Addressing Income Inequality, Poverty Reduction and Inclusive Growth," IZA Discussion Papers 8119, Institute for the Study of Labor (IZA).
  18. Bergh, Andreas & Fink, Günther, 2009. "Higher education, elite institutions and inequality," European Economic Review, Elsevier, vol. 53(3), pages 376-384, April.
  19. Tali Regev, 2007. "Imperfect information, self-selection and the market for higher education," Working Paper Series 2007-18, Federal Reserve Bank of San Francisco.

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