Educational opportunity and income inequality |
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| Institution: | 1. Department of Economics, Northwestern University, United States;2. NBER, United States;3. Departament d''Economia i Empresa, Universitat Pompeu Fabra, Ramon Trias Fargas, 25-27, 08005, Barcelona, Spain;4. Research Department, Federal Reserve Bank of Boston, United States;1. Department of Economics, Santa Clara University, 500 El Camino Real, Santa Clara, CA 94650, United States;2. Department of Economics, Haverford College, 370 Lancaster Avenue, Haverford, PA 19041, United States;1. Aarhus Universitet, Denmark;2. The University of Queensland, Australia;3. European University Institute, Italy;1. University of Nottingham, Nottingham, UK;2. Peking University, Beijing, China;1. Center for Chinese Public Administration Research/School of Government, Sun Yat-sen University, Guangzhou, 510275, China;2. Department of Social Policy and Social Work, University of York, Heslington, York, YO10 5DD, United Kingdom;1. National University of Malaysia (UKM), 43600, Bangi, Selangor, Malaysia;2. Paris School of Economics (PSE), 48 Boulevard Jourdan, 75014, Paris, France |
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| 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 Spence, A. Michael, 1973. Job Market Signalling, Quarterly Journal of Economics, 87(3) Aug., 355–374]. 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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