Educational Opportunity and Income Inequality

37 Pages Posted: 4 Mar 2006

See all articles by Igal Hendel

Igal Hendel

Northwestern University - Department of Economics; National Bureau of Economic Research (NBER)

Joel Shapiro

Universitat Pompeu Fabra - Faculty of Economic and Business Sciences

Paul Willen

Federal Reserve Bank of Boston - Research Department; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

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

Hendel, Igal E. and Shapiro, Joel David and Willen, Paul S., Educational Opportunity and Income Inequality (September 2004). FRB of Boston Public Policy Discussion Paper No. 04-5, Available at SSRN: https://ssrn.com/abstract=887927 or http://dx.doi.org/10.2139/ssrn.887927

Igal E. Hendel

Northwestern University - Department of Economics ( email )

2003 Sheridan Road
Evanston, IL 60208
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Joel David Shapiro

Universitat Pompeu Fabra - Faculty of Economic and Business Sciences ( email )

Ramon Trias Fargas 25-27
Barcelona, 08005
Spain
+34 93 542 27 18 (Phone)
+34 93 542 17 46 (Fax)

Paul S. Willen (Contact Author)

Federal Reserve Bank of Boston - Research Department ( email )

600 Atlantic Avenue
Boston, MA 02210
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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