This paper examines policies designed to alter the equilibrium distribution of education and their wider economic consequences. It also looks at the nature of education decisions and the role that such decisions play in shaping life cycle earnings and wealth profiles. Individual choices are analyzed in the context of a general equilibrium model with separate, education-specific spot markets for jobs. The unit price of (efficiency-weighted) labor differs by education group and equals marginal product.
We are interested in the equilibrium, long-term effects of policy interventions targeting the wider population rather than limited groups, with relative labor prices endogenously adjusting to changes in the aggregate supply of educated people. We examine traditional policies, such as tuition transfers and loan subsidies, but we also devise and evaluate alternative forms of policy intervention. The policy experiments are carried out through numerical simulations, with some of the model’s parameters directly estimated from PSID, NLSY and CPS data and others calibrated to match specific long-term features of the US economy. By simulating and comparing equilibrium outcomes we aim to explore the quantitative aspects of the relationship among schooling decisions, wages inequality and education policy. The impact of diverse education policies on equilibrium measures of productivity, consumption and welfare is also considered.
Research linking human capital (HC) investment to life cycle earnings dates back to original work by Mincer (1958), Becker (1964) and Ben-Porath (1967). The first studies ignored the important issue of self selection into education, as described by Rosen (1977) and Willis and Rosen (1979). Both permanent and persistent individual characteristics are now acknowledged as important determinants of education choices and have become a standard feature of HC models. Empirical evidence supporting the plausibility of a link between human capital accumulation and economic inequality has been provided, among others, by Mincer (1994).
In work relating education policies and individual preferences Fernandez and Rogerson (1995) originally point out that heterogeneity among individuals, whether in terms of income, ability or locality, can generate conflicting preferences as to the kind of policies that are most desirable. Studies on the evaluation of policy interventions in equilibrium are more recent. Heck-man, Lochner, and Taber (1998b, 1998c) have led the way in advocating an approach to policy evaluation which does not overlook equilibrium effects induced by the policy. In fact, statements regarding the effects of policy interventions which ignore price changes induced by such interventions can be misleading. Fernandez and Rogerson (1998) provide an interesting application of general equilibrium (G.E.) modeling to the evaluation of education-finance reform in the US. Later work by Cunha, Heckman, and Navarro (2004) reinforces the view that models that are able to construct equilibrium counterfactuals are essential to understanding the wider consequences of policy interventions.
In the empirical literature on education policy, early work by Keane and Wolpin (1997) focuses on the partial equilibrium effect of a tuition subsidy on young males’ college participation. A valuable generalization of their approach within a dynamic GE framework is due to Lee (2001). Also Abraham (2001) examines wage inequality and education policy in a GE model of skill biased technological change. All these studies restrict labor supply to be fixed, although earlier theoretical research has uncovered interesting aspects of the joint determination of life cycle labor supply and HC investment, among others Blinder and Weiss (1976).
Download
Equilibrium Effects of Education Policies: a Quantitative Evaluation
