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Educational Opportunity and Income Inequality

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  • Paul Willen
  • Igal Hendel
  • Joel Shapiro

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 or lower 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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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10879.

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Date of creation: Nov 2004
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Publication status: published as Hendel, Igal & Shapiro, Joel & Willen, Paul, 2005. "Educational opportunity and income inequality," Journal of Public Economics, Elsevier, vol. 89(5-6), pages 841-870, June.
Handle: RePEc:nbr:nberwo:10879

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Cited by:
  1. Crifo, Patricia, 2008. "Skill supply and biased technical change," Labour Economics, Elsevier, Elsevier, vol. 15(5), pages 812-830, October.
  2. Marcello D'Amato & Dilip Mookherjee, 2012. "Educational Signaling, Credit Constraints and Inequality Dynamics," CSEF Working Papers, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy 311, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
  3. 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, OECD Publishing 931, OECD Publishing.
  4. 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).
  5. Anil Duman, 2008. "Education and Income Inequality in Turkey: Does Schooling Matter?," Financial Theory and Practice, Institute of Public Finance, Institute of Public Finance, vol. 32(3), pages 369-385.
  6. David A. Green, 2007. "A Cautionary Discussion about Relying on Human Capital Policy to Meet Redistributive Goals," Canadian Public Policy, University of Toronto Press, University of Toronto Press, vol. 33(4), pages 397-418, December.
  7. Tali Regev, 2007. "Imperfect information, self-selection and the market for higher education," Working Paper Series, Federal Reserve Bank of San Francisco 2007-18, Federal Reserve Bank of San Francisco.
  8. Dean Corbae' & Tzu-Ying Chen, 2010. "Can Credit Market Signalling Improve Labor Market Outcomes?," 2010 Meeting Papers, Society for Economic Dynamics 685, Society for Economic Dynamics.
  9. Ning, Guangjie, 2010. "Can educational expansion improve income inequality? Evidences from the CHNS 1997 and 2006 data," Economic Systems, Elsevier, Elsevier, vol. 34(4), pages 397-412, December.
  10. Atayev, Atabek, 2013. "On the Earliest Economic Growth and Income Inequality; or Modified Old Philosophical, Forgotten or Ignored, Study Reconsidered and Developed," MPRA Paper 45448, University Library of Munich, Germany.
  11. Theodore Koutmeridis, 2013. "The Market for "Rough Diamonds": Information, Finance and Wage Inequality," CDMA Working Paper Series, Centre for Dynamic Macroeconomic Analysis 201307, Centre for Dynamic Macroeconomic Analysis, revised 14 Oct 2013.
  12. 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.
  13. Ordine, Patrizia & Rose, Giuseppe, 2011. "Inefficient self-selection into education and wage inequality," Economics of Education Review, Elsevier, Elsevier, vol. 30(4), pages 582-597, August.
  14. Rose, Giuseppe, 2013. "Endogenous ranking in a two-sector urn-ball matching process," Economics Discussion Papers, Kiel Institute for the World Economy 2013-40, Kiel Institute for the World Economy.
  15. Robert Dur, 2006. "Status-Seeking in Violent Subcultures and the Double Dividend of Zero-Tolerance," Tinbergen Institute Discussion Papers, Tinbergen Institute 06-005/1, Tinbergen Institute.
  16. Theodore Koutmeridis, 2013. "The Market for "Rough Diamonds": Information, Finance and Wage Inequality," Discussion Paper Series, Department of Economics, Department of Economics, University of St. Andrews 201307, Department of Economics, University of St. Andrews, revised 14 Oct 2013.
  17. Bergh, Andreas & Fink, Günther, 2009. "Higher education, elite institutions and inequality," European Economic Review, Elsevier, Elsevier, vol. 53(3), pages 376-384, April.
  18. 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.
  19. Yuki, Kazuhiro, 2009. "Education, Signaling, and Wage Inequality in a Dynamic Economy," MPRA Paper 16982, University Library of Munich, Germany.
  20. Toshiki Tamai, 2009. "Inequality, unemployment, and endogenous growth in a political economy with a minimum wage," Journal of Economics, Springer, Springer, vol. 97(3), pages 217-232, July.
  21. Jorge Calero & Josep-Oriol Escardíbul, 2014. "Barriers to non-formal professional training in Spain in periods of economic growth and crisis. An analysis with special attention to the effect of the previous human capital of workers," Working Papers, Institut d'Economia de Barcelona (IEB) 2014/12, Institut d'Economia de Barcelona (IEB).

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