TY - JOUR
T1 - Educational opportunity and income inequality
AU - Hendel, Igal
AU - Shapiro, Joel
AU - Willen, Paul
N1 - 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 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.
PY - 2005/6
Y1 - 2005/6
N2 - 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.
AB - 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.
KW - College loans
KW - College premium
KW - Education signaling
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U2 - 10.1016/j.jpubeco.2004.11.004
DO - 10.1016/j.jpubeco.2004.11.004
M3 - Article
AN - SCOPUS:14844330066
VL - 89
SP - 841
EP - 870
JO - Journal of Public Economics
JF - Journal of Public Economics
SN - 0047-2727
IS - 5-6
ER -
