Rising Wage Inequality and Human Capital Investment Lancelot

Abstract

In this paper, we fill the gap in the existing literature on the causal effects of rising inequality on human capital investment. First, we propose an instrumentation strategy that yields a vector of instruments from a predicted local wage distribution by interacting initial industry employment shares at the metropolitan level with changes to the within-industry distribution of wages at the national level. With this instrumentation strategy, we are able to separately analyze the causal impact of changing inequality from changes in mean income on postsecondary enrollments. This paper establishes an empirical fact: predicted increases in local wage inequality depress rates of enrollment in postsecondary schooling. In our main analysis on community college enrollments, we find that moving from the 10th to the 90th percentile of changes in wage inequality corresponds to a 2.05 percentage point decrease in first-year, full-time aggregate community college enrollments. Further, we find evidence of a causal relationship between rising local inequality and residential sorting on an income basis which sheds light on a possible mechanism driving our main result. The instrumentation strategy introduced in this paper could allow researchers to assess the causal relationship between inequality and other economic phenomena. 1 Email: lancelot@uchicago.edu, csloane@uchicago.edu. We are indebted to Marianne Bertrand, Dan Black, Kerwin Charles, and Erik Hurst for support and guidance throughout this project. We are grateful for comments from Steven Durlauf, Michal Fabinger, Emir Kamenica, Ben Keys, Susan Mayer, Glen Weyl, and Seth Zimmerman. We thank Dan Alexander for collaboration that propelled this project. We thank seminar participants at Chicago Booth, Chicago Harris and the University of Chicago Economics Department for feedback.

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Cite this paper

@inproceedings{Frahan2015RisingWI, title={Rising Wage Inequality and Human Capital Investment Lancelot}, author={Henry de Frahan and Carolyn M. Sloane and Marianne Bertrand and Dan Black}, year={2015} }