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Explaining Rising Income and wage Inequality Among the College Educated

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  • Caroline M. Hoxby
  • Bridget Terry

Abstract

The incomes and wages of college-educated Americans have become significantly more dispersed since 1970. This paper attempts to decompose this growing dispersion into three possible sources of growth. The first source, or extensive margin,' is the increasing demographic diversity of people who attend college. The second is an increasing return to aptitude. The third, or intensive margin,' combines the increasing self-segregation (on the basis of aptitude) of students among colleges and the increasing correlation between the average aptitude of a college's student body and its expenditure on education inputs. These tendencies are the result of changes in the market structure of college education, as documented elsewhere. We find that about 70% of the growth in inequality among recipients of baccalaureate degrees can be explained with observable demographics, measures of aptitude, and college attributes. About 50% of the growth in inequality among people who have 2 years of college education can be similarly explained. Of the growth that can be explained, about 1/4th is associated with the extensive margin, 1/3rd with an increased return to measured aptitude, and 5/12ths with the intensive margin. If the intensive margin is not taken into account, the role of increasing returns to aptitude is greatly overstated.

Suggested Citation

  • Caroline M. Hoxby & Bridget Terry, 1999. "Explaining Rising Income and wage Inequality Among the College Educated," NBER Working Papers 6873, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:6873 Note: LS
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    Citations

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    Cited by:

    1. John Bound & Brad Hershbein & Bridget Terry Long, 2009. "Playing the Admissions Game: Student Reactions to Increasing College Competition," Journal of Economic Perspectives, American Economic Association, vol. 23(4), pages 119-146, Fall.
    2. Curs, Bradley & Singell, Larry Jr., 2002. "An analysis of the application and enrollment processes for in-state and out-of-state students at a large public university," Economics of Education Review, Elsevier, vol. 21(2), pages 111-124, April.
    3. Caroline M. Hoxby, 2009. "The Changing Selectivity of American Colleges," Journal of Economic Perspectives, American Economic Association, vol. 23(4), pages 95-118, Fall.
    4. Angel de la Fuente & Antonio Ciccone, 2003. "Human capital in a global and knowledge-based economy," UFAE and IAE Working Papers 562.03, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
    5. Pedro Carneiro & Sokbae Lee, 2011. "Trends in Quality-Adjusted Skill Premia in the United States, 1960-2000," American Economic Review, American Economic Association, vol. 101(6), pages 2309-2349, October.
    6. David L. Sjoquist & John V. Winters, 2016. "The Effects of State Merit Aid Programs on Attendance at Elite Colleges," Southern Economic Journal, Southern Economic Association, vol. 83(2), pages 527-549, October.
    7. Kerwin Kofi Charles & Ming-Ching Luoh, 2003. "Gender Differences in Completed Schooling," The Review of Economics and Statistics, MIT Press, vol. 85(3), pages 559-577, August.
    8. Stacy Berg Dale & Alan B. Krueger, 2002. "Estimating the Payoff to Attending a More Selective College: An Application of Selection on Observables and Unobservables," The Quarterly Journal of Economics, Oxford University Press, vol. 117(4), pages 1491-1527.
    9. Albert Saiz & Elena Zoido, 2002. "The returns to speaking a second language," Working Papers 02-16, Federal Reserve Bank of Philadelphia.
    10. Katharine L. Bradbury, 2002. "Education and wages in the 1980s and 1990s: are all groups moving up together?," New England Economic Review, Federal Reserve Bank of Boston, issue Q 1, pages 19-46.
    11. Cornwell, Christopher & Mustard, David B., 2006. "Merit Aid and Sorting: The Effects of HOPE-Style Scholarships on College Ability Stratification," IZA Discussion Papers 1956, Institute for the Study of Labor (IZA).
    12. Christopher Avery & Caroline Minter Hoxby, 2004. "Do and Should Financial Aid Packages Affect Students' College Choices?," NBER Chapters,in: College Choices: The Economics of Where to Go, When to Go, and How to Pay For It, pages 239-302 National Bureau of Economic Research, Inc.
    13. Hesham ABDEL-RAHMAN, "undated". "Trade, Urban Systems, and Labor Markets," Regional and Urban Modeling 284100000, EcoMod.
    14. Bridget Terry Long, 2004. "Does the Format of a Financial Aid Program Matter? The Effect of State In-Kind Tuition Subsidies," The Review of Economics and Statistics, MIT Press, vol. 86(3), pages 767-782, August.
    15. NAKAMURO Makiko & INUI Tomohiko, 2013. "The Returns to College Quality in Japan: Does Your College Choice Affect Your Earnings?," ESRI Discussion paper series 306, Economic and Social Research Institute (ESRI).
    16. Terry Long, B.Bridget, 2004. "How have college decisions changed over time? An application of the conditional logistic choice model," Journal of Econometrics, Elsevier, vol. 121(1-2), pages 271-296.
    17. 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.
    18. Rodolfo E. Manuelli, 2000. "Technological Change, the Labor Market and the Stock Market," NBER Working Papers 8022, National Bureau of Economic Research, Inc.
    19. David S. Loughran, 2000. "Does Variance Matter? The Effect of Rising Male Inequality on Female Age at First Marriage," Working Papers 00-12, RAND Corporation.

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