Education subsidies

Economic inequality touches upon the core of social and ethical thinking. Whereas economics probably is the science most suitable for making testable and measurable predictions on the causes and consequences of inequality, it is obvious that all social sciences have a place in the debate concerning the most suitable government actions of redistributing ‘the economic pie’.

If education subsidies increase (or more generally, education becomes cheaper), investing in human  apital (and thus labour quality) becomes more attractive, both for poor and rich people. However, which group will benefit the most from this is ambiguous as it may depend both on the specifications of the subsidy schemes and the ways in which individuals react to them. Perhaps even more important however, is the way in which we are actually measuring the progressivity of the subsidy. That is, before one can measure the redistributive effects of education subsidies, it should be clarified from which perspective we are measuring inequality. It is of major importance to focus on this measurement issue, since the literature is not very clear in this respect. The methods of measurement of inequality can be classified as ‘static’ (partial) or ‘dynamic’ (general).

The static perspective examines whether the direct subsidy receipts mainly end up at poor or rich households. If for example students’ access to education depends positively on household income, it may be the case that rich households deliver a relatively large amount of children at higher education institutions. As a result then, rich households would receive a more that proportional amount of the subsidy receipts. For such a measurement to be complete, it should incorporate the notion that rich households pay a higher than proportional tax amount as well. Whether they will still be better off under the subsidy will therefore depend on their net benefit. Most empirical work indeed incorporates this notion.

Whether or not subsidies are progressive, is measured by the change in household income inequality before, and directly after the subsidies are imposed. Clearly then, this measurement is conducted at a point in time and therefore can be classified as static. The dynamic perspective focuses on the general equilibrium aspect of the public subsidy schemes. That is, it is acknowledged  that subsidies are implemented to influence learning decisions of the young, thereby increasing their productivity and lifetime earnings potential. Now, to measure whether subsidies increase or decrease inequality, it is better to sit and wait for all the decisions and effects to run through the economy. Then test can be perfprmed whether or not they yield a more equal income distribution, compared to cases where no subsidy exists. Intuitively, it is unclear whether this general effect leads to a more equal income distribution. It depends on the interplay of two effects, which is known as the ‘ability effect’ and ‘wealth effect’. On the one hand, persons with a high innate ability might experience a high elasticity of education demand, because they have a high ‘return to learning’. Thus the persons, who’s earning potential is already highest, receive an extra incentive to study through the subsidy. On the other hand, this elasticity could be high for poor persons as well, to the extent that without a subsidy, they would be constrained in their decisions on education. If a subsidy is introduced, poor persons can get access to schooling and escape from the poverty trap. If the first (ability) effect dominates, education subsidies would increase inequality, while the opposite is expected if the second (wealth) effect is of greater importance. Of course the ‘wealth effect’ stands in close connection with the static effect, as they both depend on the way in which persons have access to schooling. However, the actual measurement is quite different.

So, it becomes clear that there is an enormous lacuna between the perspectives and methods of research. In the literature this gap remains open wide up and until the day of writing. Authors departing from the theoretical view have presented multiple models revealing the general equilibrium effects of subsidies on inequality. Their intergenerational models explaining the dynamic issues are highly sophisticated. In sharp contrast with the theoretical work, the empirical literature has not been able to reach beyond a measurement of the static effect.

The field of government intervention in the education sector suffers from a lack of coherent research. Whereas the authors of theoretical literature have developed a large bulk of intergenerational models, explaining the general equilibrium effects of changes in education subsidies, empirical work is restricted by lack of data. As Conlisk (1977) noted, data on matched parent-child lifetime earnings would be needed to reach to the core of the field from an empirical viewpoint. The methodology of zooming out and estimating the effects from a cross-country or macro-perspective is fragile, but might  at least offer government with a new point of view through which the general relations become clear.

The media shows a hint at a progressive effect of public education subsidies. The main channel through which the progressivity is achieved seems to be the static effect. That is, public education subsidies mainly benefit the poor because of the direct transfers they receive. Abstracting from this direct effect, the subsidies have no significant effect on inequality; it is only after incorporating transfers and taxes to our definition of inequality that the true progressive nature of the subsidies comes to the fore. All this does not imply that this paper proposes to prevent the system from changing. Recently, the notions of alternative programs of student aid, such as income contingent loans and graduate taxes are gaining ground rapidly.

Furthermore, all policy implications depend upon the preferences of the government. Most models have in common that the government searches for redistribution to a certain extent. But other aspects such as equality of opportunity and social mobility may play a role as well. So again, the mixture of positive and normative arguments appears. In that aspect, decisions on public education subsidies are no different than all other political processes; coloured by differences in ideology. The economic approach is probably most suitable to provide the guidelines of the debate. However, the theoretical and empirical methodologies attacked the problem from different viewpoints in the past. To the extent that agreement on methodology has not been reached, consensus among policy implications is even further away. Therefore, it goes without saying that this only amplifies the confusion in the area of conduct. To give useful implications for actual policy, at least need a coherent framework from which to start is needed.


~ by ketekbasahminggir on September 27, 2012.

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