Increasing skill premium and education decisions

Working Paper 2023-643

Abstract

This paper analyses the effects of an increase in earnings inequality between skilled and unskilled workers on education decisions and intergenerational mobility, depending on the way higher education is funded. The rise in inequality typically encourages higher education attending, but it also (i) improves the relative position of children from skilled families by reducing inter-skill intergenerational mobility and (ii) fosters inequality across skilled workers (‘intra-skilled inequality’) when higher education is costly. The impact depends on education financing and the only situation in which skilled families are not favoured is when higher education is freely provided. Those results are in line with the developments observed in advanced economies which have experienced a constant increase in their skill premia in the last four decades.

Authors: Joel HELLIER.