Educational opportunity and income inequality

Igal Hendel; Joel Shapiro; Paul Willen

doi:10.1016/j.jpubeco.2004.11.004

Educational opportunity and income inequality

Igal Hendel, Joel Shapiro^*, Paul Willen

^*Corresponding author for this work

Economics

Research output: Contribution to journal › Article › peer-review

50 Scopus citations

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.

Original language	English (US)
Pages (from-to)	841-870
Number of pages	30
Journal	Journal of Public Economics
Volume	89
Issue number	5-6
DOIs	https://doi.org/10.1016/j.jpubeco.2004.11.004
State	Published - Jun 2005

Funding

We thank Patrick Bolton, Kathy Bradbury, Larry Katz, John Knowles, Omer Moav, Thomas Piketty, Harvey Rosen, Robert Shimer, Geoff Tootell, Ernesto Villanueva, an anonymous referee, and the audiences at U. Pompeu Fabra, U. Autonoma de Barcelona, U. Nova Lisboa, U. Alicante and the Boston Fed for their comments. We also thank Daniel Davidson for excellent research assistance. Shapiro gratefully acknowledges financial support from the Ministerio de Ciencia y Tecnologìa and FEDER (BEC2003-00412) and Barcelona Economics (CREA). Willen gratefully acknowledges research support from the Graduate School of Business at the University of Chicago. The views expressed in this paper belong to the authors and do not necessarily reflect those of the Federal Reserve Bank of Boston or the Federal Reserve System.

Keywords

College loans
College premium
Education signaling

ASJC Scopus subject areas

Finance
Economics and Econometrics

UN SDGs

This output contributes to the following UN Sustainable Development Goals (SDGs)

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10.1016/j.jpubeco.2004.11.004

Cite this

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title = "Educational opportunity and income inequality",

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.",

keywords = "College loans, College premium, Education signaling",

author = "Igal Hendel and Joel Shapiro and Paul Willen",

note = "Funding Information: We thank Patrick Bolton, Kathy Bradbury, Larry Katz, John Knowles, Omer Moav, Thomas Piketty, Harvey Rosen, Robert Shimer, Geoff Tootell, Ernesto Villanueva, an anonymous referee, and the audiences at U. Pompeu Fabra, U. Autonoma de Barcelona, U. Nova Lisboa, U. Alicante and the Boston Fed for their comments. We also thank Daniel Davidson for excellent research assistance. Shapiro gratefully acknowledges financial support from the Ministerio de Ciencia y Tecnolog{\`i}a and FEDER (BEC2003-00412) and Barcelona Economics (CREA). Willen gratefully acknowledges research support from the Graduate School of Business at the University of Chicago. The views expressed in this paper belong to the authors and do not necessarily reflect those of the Federal Reserve Bank of Boston or the Federal Reserve System. ",

year = "2005",

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doi = "10.1016/j.jpubeco.2004.11.004",

language = "English (US)",

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Educational opportunity and income inequality

Abstract

Funding

Keywords

ASJC Scopus subject areas

UN SDGs

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