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Publisher : Elsevier - Science Direct (الزویر - ساینس دایرکت)
Journal : Journal of Public Economics, Volume 89, Issues 5–6, June 2005, Pages 841–870
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.
Governments at both the national and the state level in the United States spend large sums of money to make education affordable for the average American. Although subsidized state universities date to the 19th century, a focus on making college affordable for all dates to the Second World War. Starting with the GI Bill in 1944, the federal government has provided an ever-expanding package of grants, subsidized loans, subsidized ‘work-study’ jobs and other financial devices to college-going Americans. The results speak for themselves: between 1947 and 1999, the percentage of people 25 years old and over who had completed 4 or more years of college increased from 5.4% to 23.6%. By 2001, direct appropriations and grants at the state and federal levels had grown to $86 billion a year.1 Nevertheless, many policy makers still think that college tuition remains a substantial and possibly insurmountable financial burden for American families. Ten bills directly addressing financial assistance for postsecondary education were proposed in Congress during 2003.2 Both main candidates in the 2004 U.S. presidential election advocate making college more affordable. Bush touts his plan for “Strengthening Access to Post-Secondary Education and Job Training”.3 The Kerry campaign website says, “…every young person who works hard and wants to go to college should be able to afford it”.4 Why does everyone think that making higher education affordable is a worthy goal for public policy? Many argue that education has positive social externalities. But others make the case that broader access to education promotes equality. For example, Harvard University President Larry Summers said in a Wall Street Journal interview, “No doubt, without this progress in promoting access to higher education, inequality would be even higher”.5 In this paper, however, we argue that making education more affordable can lead to higher income inequality. We look at a world in which education acts as a signal of ability and households are credit-constrained, and we show that improved educational opportunity can increase wage inequality. The mechanism that drives our results is the ‘signaling’ role of education first explored by Spence (1973). Following his model, we make education costly in terms of tuition and effort, and the effort required is greater for low-ability persons. When households face credit constraints, lack of education could mean one of two things: low ability; or high ability and low financial resources. In other words, in contrast to Spence's model where differences in educational attainment can arise only as a consequence of heterogeneity in ability, differences in educational attainment in our model reflect either heterogeneity in ability or financial resources. The wage of uneducated workers reflects the mix of abilities: the smaller the proportion of high-ability persons in the uneducated pool, the lower the wage for unskilled labor. Thus, as we improve opportunities for higher education, either by providing direct grants for tuition or by reducing the interest rate that households pay to borrow for an education, more high-ability workers get an education and the quality of the unskilled pool drops, lowering the unskilled wage. How important an effect is this? We ask the reader to consider the following question. Suppose you meet two people without any postsecondary education, one born in 1915 and the other born in 1975. Is your inference about their abilities relative to their cohorts the same? We argue that any inference about their lack of college education should be quite different. Very little information is conveyed about the ability of the individual who grew up in the earlier period with fewer opportunities, while a stigma is associated with a lack of education in more recent times. In the paper, we formalize the above intuition in a simple model of wage determination. We first consider a static model and frame our results in the standard labor supply and labor demand paradigm. We show that the assumptions of a signaling role for education and credit constraints lead to an upward sloping demand curve for unskilled workers. Firms are willing to pay unskilled workers more when they are more likely to be of high ability. Thus, lowering tuition and the interest rate on borrowing leads to a reduction in the supply of unskilled workers, which in turn lowers the wage of unskilled workers. We then consider a multi-generation framework, in which households consume and leave bequests for their children, who can use the bequests to pay for education. We show that a scenario may emerge in which, as more and more high-ability workers become educated, the wages of unskilled workers fall. We call this the “kick-down-the-ladder” scenario since falling wages make it progressively more difficult and eventually impossible for the remaining high-ability, low-wealth households to accumulate enough money to make the leap to education. The first generations of high-ability households that make the leap to skill kick down the ladder of opportunity for subsequent generations. We show that in some cases, though, intergenerational wealth transfers can overcome the problem of credit constraints and allow all high-ability persons to get an education. Of course, this comes at a cost of higher inequality. We believe our paper is relevant from both positive and normative angles. First, our model shows that more equality in opportunities can lead to more inequality in outcomes, contrary to common wisdom. Second, the expansion of educational opportunity in the United States in the postwar era coincided with a significant expansion in the skill premium. Such an outcome is inconsistent with standard supply-and-demand analysis, in which the increase in supply of skilled labor should reduce the relative wage of skilled workers, but it is consistent with our model's conclusions. Nevertheless, we do not view our results as a definitive explanation of the skill premium or anything even close to that but as a contribution to such an explanation. Moreover, in the model we take the extreme position that education plays only a signaling role, an assumption that was made purely for expositional ease. Adding a productivity-enhancing aspect to education would not change our basic results.6 The paper proceeds as follows. In the remainder of this section, we discuss the relevant literature. In Section 2, we discuss our static model. In Section 3, we extend the model to a multi-generation world. In Section 4 we look at empirical evidence. A brief conclusion follows in Section 5. 1.1. Related literature Our work touches on three bodies of literature in economics. First, researchers starting with Spence (1973) have explored the role of signaling in labor markets. Since Spence's seminal article in 1973, the debate over the validity of education as a signal versus its value in building human capital has been heated. A review of the debate can be found in Fang (2000). Bedard (2001) argues for the significance of the role of signaling, examining the effect of increased access to universities on individuals' incentives to drop out of high school. She provides empirical evidence that signaling has a role in determining behavior. In the paper most similar to ours, Krugman (2000) argues that signaling could play a role in the expansion of wage inequality in the postwar era. In Krugman's model, households do not face credit constraints, and the increase in wage inequality comes from moving from one equilibrium with low inequality to another with high inequality. Our model does allow for multiple equilibria with high and low inequality, but multiple equilibria do not play a role in our analysis of the dynamics of the skill premium. Researchers have explored many reasons why wage inequality has changed over time in the United States and in other countries. Most studies analyzing the college premium have focused on demand factors; technology-skill complementarities and international trade's effect on skill composition are the most prominent explanations. For surveys of the literature, see Acemoglu (2002), Levy and Murnane (1992), and Aghion et al. (1999). Katz and Murphy (1992) also point to the rate of change in the supply of college graduates as one explanation of the data. Theoretical studies have had difficulty in capturing two aspects of the increasing skill premium: the decline of unskilled wages over the past 25 years and an endogenous increase in education levels. Acemoglu (1999) and Caselli (1999) resolve the first issue since the capital/labor ratio for unskilled workers falls endogenously in their papers. Acemoglu (1998) addresses the second issue. Galor and Moav (2000) and Gould et al. (2001) are able to capture both aspects, with the first coming through a depreciation of skill due to technological progress. Finally, our model builds on theoretical papers in which imperfections in the credit market determine income distribution dynamics (for example, Loury, 1981; Banerjee and Newman, 1993; and Aghion and Bolton, 1997). Our contribution is to use signaling as the basis for wage formation. Formally, our model draws from Galor and Zeira (1993). Fernandez and Rogerson (2001) also look at inequality in a model in which credit market imperfections affect educational attainment decisions, but with a different wage formation mechanism.
نتیجه گیری انگلیسی
In this paper, we argue that reducing financial constraints for postsecondary education can increase wage inequality. We use a dynamic approach based on job market signaling, a mechanism that has been unexplored in recent work on wage inequality. A reduction in the interest rate increases the number of the poor who get educated in steady state, lowering the average ability of the uneducated pool, and therefore increasing the wage gap. In the last 60 years, two events (the G.I. Bill and the Higher Education Act) significantly reduced the cost of higher education, while many subsequent acts have further increased its overall accessibility. Our work suggests two natural directions for future research. First, researchers have identified many factors that, in theory, might affect the relationship between wages and education. One natural question to ask is how these other factors interact with the mechanism we have described here. Second, while we have provided some stylized facts that are consistent with the ideas in this paper, formal empirical tests can provide evidence on how changing financial opportunities have affected wage inequality.