Educational Opportunity and Income Inequality
37 Pages Posted: 4 Mar 2006
There are 2 versions of this paper
Educational Opportunity and Income Inequality
Educational Opportunity and Income Inequality
Date Written: September 2004
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 (1973). 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 easier or 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: education signaling, college premium, college loans
JEL Classification: D82, I22, I28, J31
Suggested Citation: Suggested Citation
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