Tuesday, 7 September 2010

Killing three birds with the one stone: education improves equality

Rory O'Farrell: While access to education is usually thought of in terms of equality of opportunity, it can also lead to equality of outcome.

The OECD has recently published data on educational attainment. Comparing this with OECD data on the Gini coefficient (probably the best way to measure inequality and present the income distribution into a single figure), we can gain an insight into how education affects inequality.

The above figure shows a clear downward relationship between the proportion of adults with a 3rd level degree and inequality before taxes and transfers, suggesting high education levels compress market incomes (the relationship is stronger when we only look at the male population). This could be due to a large supply of graduates helping to reduce the wage premium of education. Evidence from the US also shows how the increased supply of graduates can reduce the education wage premium (Card and Lemieux, 2001). This may be due to a spike in US college enrolment during the Vietnam War, in order to avoid the draft, was followed by a decline in the education wage premium (though it then recovered an inequality increased).

However, is it that equality leads to higher educational attainment? Comparing educational attainment and inequality after taxes and transfers show that there is no clear relationship, suggesting that the causation runs from education to equality [see note]. In the US due to inequality students will incur the expense of education (or some highly educated will migrate to the US) in order to gain the higher wages for college graduates. However in European countries, the benefit in terms of a wage premium would be lower, but the cost of education (to students/families) is also lower. Also, a more equal distribution of income before taxes boosts the social solidarity necessary for redistributive policies).

So what are the policy implications? Improving equality of opportunity is itself a worthy aim. However improving access to higher education (whether through free fees, grants, or improved primary and secondary education) can also boost equality of outcomes. So combined with promoting the smart economy, we can kill three birds with the one stone.
[note]: Card, D., and Lemieux, T., (2001). Can Falling Supply Explain the Rising Return to College for Younger Men? A Cohort-Based Analysis, The Quarterly Journal of Economics, 116(2): 705-746

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