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Educational opportunity and income inequality

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  • Hendel, Igal
  • Shapiro, Joel
  • Willen, Paul

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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Suggested Citation

  • 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:eee:pubeco:v:89:y:2005:i:5-6:p:841-870
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    Cited by:

    1. 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.
    2. 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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    5. 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 2014/12, Institut d'Economia de Barcelona (IEB).
    6. Jungsuk Kim & Almas Heshmati, 2016. "A Survey of the Role of Fiscal Policy in Addressing Income Inequality, Poverty Reduction and Inclusive Growth," Working Papers id:8421, eSocialSciences.
    7. Bozhechkova, Aleksandra & Vashchelyuk, Natalia & Nazarov, Pavel & Perevyshin, Yuri & Tumanova, Elena & Shagas, Natalia, "undated". "Modeling the Dynamic of Economic Potential," Published Papers nvg143, Russian Presidential Academy of National Economy and Public Administration.
    8. 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.
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    24. Yuki, Kazuhiro, 2009. "Education, Signaling, and Wage Inequality in a Dynamic Economy," MPRA Paper 16982, University Library of Munich, Germany.
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    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • I22 - Health, Education, and Welfare - - Education - - - Educational Finance; Financial Aid
    • I28 - Health, Education, and Welfare - - Education - - - Government Policy
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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