Association for Public Policy Analysis & Management

This paper provides some of the first empirical evidence of negative spillovers from rising wage inequality on local aggregate investments in human capital. 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 wages on postsecondary enrollments. We find that local labor markets with predicted increases in local wage inequality experienced depressed rates of enrollment in postsecondary schooling over the 2000s. 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.