How Did the Increase in Economic Inequality between 1970 and 1990 Affect American Children's Educational Attainment?

I estimate the effect of the change in the Gini coefficient of household income since 1970 on children’s chances of graduating from high school, enrolling in college, and graduating from college by combining PSID data on individual children with state-level data from the 1970, 1980, and 1990 PUMS. The Gini coefficient is negatively correlated with all three measures of educational attainment, but its estimated effect on college enrollment and college graduation becomes positive once other state characteristics are controlled. When I separate the effects of inequality due to the non-linear relationship between parental income and educational attainment and “macro” effects that result from interpersonal interactions, I find that most of the effect of inequality is due to macro effects. The effect of inequality differs for rich and poor children. The increase in college graduation attributable to the increase in inequality is confined to high-income children. The decrease in high school graduation attributable to inequality is confined to low-income children. Thus the data suggest that poor children did not benefit from the growth in inequality and may have suffered, independent of their own income. Richer children, in contrast, appear to have gained from increases in inequality, and they appear to have gained more than we would expect based on their income alone. These results are consistent with a model of relative deprivation in which individuals compare themselves to the middle of the income distribution.