Returns to education as a source of inequality: The role of regulative and redistributive policies for rising education premiums
Institute of Political Science, University of Bern, email@example.com
Institute of Political Science, University of Bern, firstname.lastname@example.org
How can we explain cross-country developments of “education premiums”, i.e. wage differences between high-educated and low-educated workers? We show that education premiums are one important aspect of economic inequality. In particular, education premiums closely track top-end wage inequality and top income shares. We argue that two sets of policies are key for the variation in education premiums: Regulation and redistribution. (a) Regulative labour market policies imply the institutionalization of floor and ceiling effects in the wage-setting system, limiting market effects for those at the bottom and at the top of the education hierarchy. (b) Redistributive welfare state policies increase the bargaining power of low-educated workers by providing outside options to the labour market, while taxation compresses high-educated workers’ wages. The analysis is based on a new dataset on education premiums constructed from LIS and EU-SILC income surveys, covering 35 countries in the period 1980-2013. For a subset of 17 core OECD countries, we show that long-term trends in education premiums are well explained by a combination of regulative and redistributive policies. Where regulative policies are weak, education premiums increased. Where redistributive policies are strong, education premiums held steady or declined.