Title: Education Decisions, Equilibrium Policies and Wages Dispersion
Abstract: This paper examines the effects of alternative policies on the distribution of education in both partial and general equilibrium. Empirical evidence suggests a link between human capital accumulation and wages dispersion, so that policies affecting education outcomes will also have an impact on inequality, productivity and welfare. We build a life-cycle model of labor earnings with endogenous labor supply and education choice, allowing for agents’ heterogeneity in several dimensions. PSID data are used to estimate relevant characteristics of education-specific dynamic earnings processes. Numerical simulations are used to compare the effects of alternative policy interventions on education participation, endogenous selection, inequality, life-cycle earnings and wealth profiles. In the current version we experiment with college tuition subsidies. It becomes apparent that while in partial equilibrium such policies can be very effective in increasing education levels and reducing inequality in general equilibrium the results are much less encouraging: The main effect of a subsidy there is to increase the supply of human capital as one would expect. However, it is the more able but liquidity constrained individuals who take up extra education, while the education levels of the less able can actually decrease (they are crowded out). Thus the subsidy acts on the composition of those in education. In many respects this is very much in line with results found by Heckman et al. (98a,b). The inclusion of risky returns on labor earnings and the fact that labor supply is endogenous lend additional credibility to the result. ∗University College London and IFS/CEMMAP; University College London and IFS; New York University. †Special thanks go to Lars Nesheim for many discussions on both theoretical and computational aspects of the problem. We are also grateful to Orazio Attanasio, Marco Bassetto, Richard Blundell, Michele Boldrin, Martin Browning, Monica Costa Dias, Marco Cozzi, Maria Cristina DeNardi, Giulio Fella, Eric French, Jonathan Heathcote, Hide Ichimura, Ken Judd, Hamish Low, Lisa Lynch, Robert Moffitt, Nicola Pavoni, Josep Pijoan-Mas, Jean-Marc Robin, Victor Rios-Rull, Jeff Smith, Robert Townsend and Fabrizio Zilibotti for comments and suggestions. All errors are ours. Correspondence: Centre for Microdata Methods and Practice, Institute for Fiscal Studies, 7 Ridgmount Street, London WC1E 7AE. E-mail: [email protected] .
Publication Year: 2005
Publication Date: 2005-01-01
Language: en
Type: preprint
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Cited By Count: 7
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