Session Information
23 SES 05 C, Structural Conditions of Education
Paper Session
Contribution
This paper seeks to model the complex relationships between skills inequality and income inequality, controlling for the effects of labour market institutions and redistributive tax and welfare policies.
Economic theory typically takes wage inequality to be determined by discrete processes relating to skills supply and demand and labour market regulation. An excess of supply relative to demand for high skills tends to reduce wage premium to graduates and thus compress wage distribution at the top, whereas an excess of demand relative to supply would have the opposite effect. At the other end of the skills distribution, if demand for lower level skills outweighs supply this would, other things being equal, put upward pressure on wages for the less qualified, thus compressing wage differentials, whereas a surfeit of low level skills relative to demand would have the opposite effect. Recent literature has emphasised the latter. According to the theories of skills-biased technological change (Thurrow, 1998), technological change raises demand for higher level skills across the job spectrum, leaving fewer jobs for less qualified individuals. As demand for low skilled individuals diminishes relative to supply, wages drop in low skilled jobs, drawing out the wage distribution at the bottom. However, such effects are mediated by the wage setting mechanisms. In cross-country analysis Nickel and Layard (1998) show that lower wage inequality is associated with high thresholds for minimum wages, established nationally through legislation, or sectorally through social partner agreements. In addition, centralised trade union bargaining is seen to be associated with lower levels of wage equality. Welfare systems are generally seen as re-distributive, affecting levels of equality in incomes and consumption between households, although they may also impact on investment in human capital (Esping-Anderson, 2003).
In these models educational inequality is seen as one of the determinants of income inequality, along with labour market regulation and welfare (Checchi, 2001). Green, Preston and Janamaat (2006), for instance, show that there is a strong correlation in cross country analysis between distributions of adult skills (as measured in the International Adult Education Survey) and income distributions (measured by the gini coefficient of household incomes). Countries with more unequal distributions of adult skills also tend to have higher levels of income inequality. Recent work by Martin Carnoy (forthcoming, 2011) shows how complicated these relationships can be. It is generally assumed, for instance, that beyond a certain level (from elite higher education to mass higher education) increasing participation in higher education would reduce incomes inequality, in as much as raising the supply relative to the demand for higher skills will reduce the wage premium to graduates and narrow the gap between the pay of graduates and non graduates. However, where the shift to mass higher education increases the diversity of types of higher education institutions, which different levels of funding per student, it may also increase differentiation in the quality of graduate degrees and thus in their value on the labour market. More differentiated earning returns to degrees might then widen rather than narrow wage distributions.
Method
Expected Outcomes
References
Carnoy, M. (forthcoming, 2011) ‘As Higher Education Expands, is it Contributing to Greater Inequality?’ National Institute Economic Review, No. 215. Checchi, D. (2001) Education, Inequality and Income Inequality, Discussion Paper No. DARP 52, London: London School of Economics. Hutton, W. (2002), The World We’re In, London, Little, Brown. Nickel, S. and Layard, R. (1998) Labour Market Institutions and Economic Performance. Centre for Economic Performance, LSE, London. Thurow, L. (1996), The Future of Capitalism, London, Nicholas Brealey Publishing
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