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Assessing policies to equalize opportunity using an equilibrium model of educational and occupational choices

  • Keane, Michael P.
  • Roemer, John E.

The inter-generational correlation of education in the U.S. is tremendous. For instance, in PSID data from 1990, young males with college-educated parents had a 70% chance of attending college. But those with high school drop-out parents had only a 15% chance. In this paper, we analyze the impact of college attendance bonus schemes designed to increase college attendance rates (and PV of lifetime income) of youth from disadvantaged backgrounds. Of course, policies that increase the supply of skilled labor may reduce the college wage premium (see Heckman et al. [Heckman, James, Lochner, Lance and Taber, Christopher, Explaining rising wage inequality: explorations with a dynamic equilibrium model of labor earnings with heterogeneous agents, Review of Economic Dynamics, 1 (1998a), 1-58; Heckman, James, Lochner, Lance and Taber, Christopher, General-equilibrium treatment effects: a study of tuition policy, American Economic Review, 88:2 (1998b), 381-386]). This may have the unintended consequence of wiping out most of the gains to the targeted groups. The strength of such equilibrium effects on wages depends on the substitutability between different types of labor. Thus, it is important to evaluate education subsidies within an equilibrium framework that allows for flexible patterns of substitution across factor inputs. This is exactly what we do here, using an overlapping generations equilibrium model of the U.S. labor market fit to PSID data from 1968 to 1996. The model allows for imperfect substitution among types of labor differentiated by education, gender, age and ten (1-digit level) occupations -- a much finer differentiation than has been considered in prior work. We find that very large college attendance bonuses are necessary to equate college attendance rates between youth whose parents had only high school degrees or were high school dropouts and youth whose parents attended at least some college. The size of these bonuses far exceeds any reasonable measure of college costs; suggesting the "costs" the bonuses overcome are primarily psychic or effort costs. For example, youth from disadvantaged backgrounds may be poorly prepared for college. This suggests that bonuses targeted at college age youth are probably a very inefficient way to reduce inequality. Earlier intervention is likely called for.

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Article provided by Elsevier in its journal Journal of Public Economics.

Volume (Year): 93 (2009)
Issue (Month): 7-8 (August)
Pages: 879-898

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Handle: RePEc:eee:pubeco:v:93:y:2009:i:7-8:p:879-898
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505578

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  1. Heckman, James J & Lochner, Lance & Taber, Christopher, 1998. "General-Equilibrium Treatment Effects: A Study of Tuition Policy," American Economic Review, American Economic Association, vol. 88(2), pages 381-86, May.
  2. Donghoon Lee & Kenneth I. Wolpin, 2006. "Accounting for Wage and Employment Changes in the U.S. from 1968-2000: A Dynamic Model of Labor Market Equilibrium," 2006 Meeting Papers 172, Society for Economic Dynamics.
  3. David Card & Thomas Lemieux, 2001. "Can Falling Supply Explain The Rising Return To College For Younger Men? A Cohort-Based Analysis," The Quarterly Journal of Economics, MIT Press, vol. 116(2), pages 705-746, May.
  4. Per Krusell & Lee E. Ohanian & Jose-Victor Rios-Rull & Giovanni L. Violante, 1997. "Capital-skill complementarity and inequality: a macroeconomic analysis," Staff Report 239, Federal Reserve Bank of Minneapolis.
  5. James Heckman & Lance Lochner & Christopher Taber, 1998. "Explaining Rising Wage Inequality: Explanations With A Dynamic General Equilibrium Model of Labor Earnings With Heterogeneous Agents," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 1(1), pages 1-58, January.
  6. Keane, Michael P & Wolpin, Kenneth I, 2001. "The Effect of Parental Transfers and Borrowing Constraints on Educational Attainment," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 42(4), pages 1051-1103, November.
  7. David H. Autor & Lawrence F. Katz & Melissa S. Kearney, 2008. "Trends in U.S. Wage Inequality: Revising the Revisionists," The Review of Economics and Statistics, MIT Press, vol. 90(2), pages 300-323, May.
  8. Donghoon Lee & Kenneth I. Wolpin, 2004. "Intersectoral Labor Mobility and the Growth of the Service Sector," PIER Working Paper Archive 04-036, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  9. Keane, Michael P & Wolpin, Kenneth I, 1997. "The Career Decisions of Young Men," Journal of Political Economy, University of Chicago Press, vol. 105(3), pages 473-522, June.
  10. Fallon, P R & Layard, P R G, 1975. "Capital-Skill Complementarity, Income Distribution, and Output Accounting," Journal of Political Economy, University of Chicago Press, vol. 83(2), pages 279-301, April.
  11. Donghoon Lee, 2005. "An Estimable Dynamic General Equilibrium Model Of Work, Schooling, And Occupational Choice," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(1), pages 1-34, 02.
  12. Geweke, John & Keane, Michael, 2000. "An empirical analysis of earnings dynamics among men in the PSID: 1968-1989," Journal of Econometrics, Elsevier, vol. 96(2), pages 293-356, June.
  13. Peter Arcidiacono, 2005. "Affirmative Action in Higher Education: How Do Admission and Financial Aid Rules Affect Future Earnings?," Econometrica, Econometric Society, vol. 73(5), pages 1477-1524, 09.
  14. Stephen V. Cameron & James J. Heckman, 1998. "Life Cycle Schooling and Dynamic Selection Bias: Models and Evidence for Five Cohorts of American Males," Journal of Political Economy, University of Chicago Press, vol. 106(2), pages 262-333, April.
  15. Jacob Mincer, 1958. "Investment in Human Capital and Personal Income Distribution," Journal of Political Economy, University of Chicago Press, vol. 66, pages 281.
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