"High aptitude students are now more likely to end up surrounded by fellow high
aptitude students and are more likely to be matched to demanding, costly
educational programs. "
In the last three decades, the incomes and wages of college-educated
Americans have become more dispersed. In fact, inequality in their incomes has
risen faster than income inequality among Americans overall. In Explaining Rising
Income and Wage Inequality Among the College-Educated (NBER Working Paper No. 6873)
, Caroline Hoxby and Bridget Terry break down the increase in income
inequality among college-educated people into three components, two of which are
conventional and one of which is new, and ask how much each factor has
contributed.
The first component is the increasing diversity of college-goers' socio-economic backgrounds. Compared to the past, today's college students are diverse
in terms of their race, ethnicity, nativity (whether they are immigrants), and
parents' income. The second component is a rise in the return to aptitude, where
aptitude includes both innate ability and academic achievement. The return to
aptitude is not observed, but especially high increases in income among workers
with high measured aptitude leads researchers like Hoxby and Terry to conclude
that the return has risen. The third component, unique to Hoxby and Terry's work,
is the change in the market structure of college education. Instead of choosing a
nearby college or a relative's college (popular methods of choosing a college in the
past), today's students choose colleges based on the match between their own
aptitude and the colleges' educational resources and student bodies. High aptitude
students are now more likely to end up surrounded by fellow high aptitude students
and are more likely to be matched to demanding, costly educational programs. In
short, aptitude differentials are falling within each college and are rising between
colleges.
Hoxby and Terry suggest that increased "student sorting" of this type has
occurred because information costs and mobility costs have decreased. ( Hoxby
discusses this in NBER Working Paper No. 6323.) It is easier than before to get
information about colleges' student bodies, the programs they offer, and sources of
financial aid. Students can travel to a distant college at a lower cost, communicate
with a distant home and friends for less money, and enjoy the same media and
culture wherever they are.
Adding up the three factors, Hoxby and Terry estimate that about 15 percent
of the growth in income and wage inequality among recipients of baccalaureate
degrees is attributable to the increased diversity of their backgrounds. About 25
percent is explained by a rise in the return to aptitude and another 30 percent by
changes in the market for higher education which have intensified student sorting.
They note that previous researchers have exaggerated the importance of an
increase in the return to aptitude because they did not take account of the changes
in the market for higher education. The remaining 30 percent of the increase in
inequality is hard to explain with the observed factors, though
.
-- David R. Francis
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