Working Paper: NBER ID: w10879
Authors: Paul Willen; Igal Hendel; Joel Shapiro
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 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: education; income inequality; financial aid; credit constraints; signaling
JEL Codes: D8; H4; I2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Making education more affordable (I22) | Increased likelihood that high-ability individuals will obtain education (I24) |
| Increased likelihood that high-ability individuals will obtain education (I24) | Reduced average ability of the uneducated population (I24) |
| Reduced average ability of the uneducated population (I24) | Increased wage inequality (J31) |
| Making education more affordable (I22) | Increased wage inequality (J31) |
| Policies aimed at increasing educational opportunities (I28) | Increased income inequality (D31) |
| High-ability individuals becoming educated (I24) | Reduced ability of the unskilled workers (F66) |