Association for Public Policy Analysis & Management

In this paper we study the associations between distributions of educational attainments (measured by both test scores and years of education) and earnings inequality, across a range of countries and cohorts. Using both skills and educational attainment measures in relation to earnings inequality, we can disentangle several mechanisms why education is rewarded on the labor market. Following standard neo-classical economic theories that focus on increasing returns to education due to skill complexity and perfect sorting of individual skills to school careers, one would expect that a positive association emerges between skill inequality (as measured in student test scores) and earnings inequality, while educational attainment inequality adds little on top of skills inequality. Following sociological theories of credentialism, however, that hold that it is all about the qualifications people hold, one would expect that inequality in the attainment of qualification levels is more important than skills inequality in the prediction of earnings inequality.  

Our empirical approach is to combine data from (inequality in) student test scores of international student assessments collected since 1964, with data on inequality in educational attainment using adult surveys, with data on earnings inequality from official European income surveys. For 82 combinations of country-cohort-gender, we can assess whether inequality in skills and attainment affects earnings inequality. The data are summarized as follows:

 

Birth year	Aged 14	Aged 28	Aged 43-44	Aged 59	matched cohorts/countries
1950	1964 (from fims: be,fi,fr,de,nl,uk)	1978 (data not available)	1994 (from echp1994: be,fr,de,nl,uk)	2009 (from silc2009: be,fi,fr,de,nl,uk)	11
1966	1980 (from sims: (be,fi,fr,hu,nl,se,uk)	1994 (from echp1994: be,fr,nl,uk)	2009 (from silc2009: be, fi,fr,hu,nl,se,uk)		11
1981	1995 (from tims: at,be,cz,dk,fr,de, gr,hu,ie,it,lv,nl,no, pt,sk,si,es,se,uk)	2009 (from silc2009: at,be,cz,dk,fr,de, gr,hu,ie,it,lv,nl,no, pt,sk,si,es,se,uk)			19

Using country and time fixed effects, and using instrumental variables regression, we demonstrate that some educational policy reforms (like public preschool provision or the introduction of standardized tests) reduce educational dispersions, which in turn reduces earnings inequality thirty years later. We find evidence for independent effects of skills inequality and educational attainment inequality, suggesting that a simple human capital model of sorting and returns is insufficient to explain the rising earnings inequalities. Nevertheless, skills inequality appeared a more important predictor of earnings inequality than educational attainment inequality. Similar to studies that focus on economic growth, our study emphasizes the role of skills independent of attainment in how the economy is affected. Furthermore, our findings support a policy focus on a reduction of skills inequality during initial education as one way to reduce earnings inequality in adulthood.