Sources of Wage Inequality: Institutional Design of Education vs. Family Capital

1. Sources of Wage Inequality: Institutional Design of Education vs. Family Capital 발제자: 백문영 (연세대학교)

2. Contents • Introduction • Theory & Hypotheses • Empirical Results • Concluding Remarks

3. Introduction • Two tracks of studies on social inequality (or exclusive social benefits): Meritocracy; Elite networks; based on institutional arrangement of education(IAoE) Social inequality; Exclusive social benefits ? Family (inherited) background; Family influences; as Family capital (FC)

4. Introduction • It has been not clear on interaction & causal relationship between institutional arrangement of education (IAoE) and family capital (FC) • IAoE*FC  wage inequality? • FC limits effectiveness of IAoE and then affects wage inequality?

5. Theory & Hypotheses:IAoE and exclusiveness • Meritocracy / Elite networks based on IAE • Social mobility ↑ • Social inequality ↑or↓ • Deterring Influences of Family Capital (FC) Meritocracy Elite Networks Institutional Arrangement of Education (IAoE) & Personal performance Hypothesis 1a: Meritocracy will be positively related to individual wage premium

6. Theory & Hypotheses:Family capital and exclusiveness • Hypotheses 2a & 2b: Family capital could be positively related to individual wage. • Intergenerational transfer of Family Capital (FC) • such as • Parental influences • Relative’s social status • Residential area … • Social mobility ↓ • Social inequality ↑

7. Theory & Hypotheses:Interactions between IAoE and FC IAoE IAoE * FC Social inequality FC Hypothesis 3a: IAoE and FC have different effects on an individual’s wage inequality

8. Theory & Hypotheses:Causal relationship b/w IAE and FC • The causal relationship b/w IAE and FC: • Finnish study • German study • Korean study – increasing influence of family background on the opportunity of education • “Widening participation” in England

9. Theory & Hypotheses:Causal relationship b/w IAE and FC Individual’s wage premium Family Capital (FC) Institutional Arrangement of Education (IAoE) ( Father’s education ) ( Elite school graduation ) Hypothesis 3b: FC affects IAoE, and the latter changes an individual’s wage

10. Empirical results:variables • Dependent variable • log(individual’s hourly wage) • To measure wage premium effect • Independent variables • IAoE in Korea: top-10 elite school graduation • FC in Korea: father’s education of university-level and relative’s social status • Control variables • Age, Gender, Job exp, Job exp squared, Cognitive ability(scores of CSAT), Education years, Year dummies

11. Empirical results:data and methods • Dataset 1: “Korean Labor and Income Panel Study” (KLIPS) data • Individuals’ biological, educational, labor-related, FC-related information (2002~2008) • Dataset 2: Database of “Jin-Hak-Sa” • To measure the rankings of universities in Korea • Contains average CSAT scores of most four-year universities (1996~2008)

12. Empirical results:data & methods • An unbalanced panel data by combining two datasets • 1362 observations over 7 surveyed years • 174 ~ 210 individuals in each year

13. Empirical results:data & methods • Statistical methods: • Pooled regression approach to test • Hypotheses 1, 2a, 2b • Investigating the general effects of IAE and FC on wage inequality; • Two cases of two-stage least squares approach • Case 1: To find the relative influencesof father’s education and elite school graduation on wage inequality (Hypothesis 3a) • Father’s education used as instrumental variables, to extract pure effects of elite school graduation

14. Empirical results:data & methods • Case 2: To find the causal relationship between Father’s education and Elite school graduation (Hypothesis 3b) toward wage inequality • (1) “Father’s education” used as Endogenous regressor in the first stage; and then “Elite school graduation” used as dependent variable • (2) “Elite school graduation” used as Endogenous regressor in the first stage; and then “Father’s education” used as dependent variable • Both (1) and (2) use “Age” as an instrumental variable

15. Empirical results: Statistical results • Table 2: Testing Hypotheses 1a, 2a, and 2b • Evaluate the effects of IAE and FC on wage inequality • From model 2, observed positive relation b/w IAE and wage inequality • 23.8% of wage premium for elite school graduation against two-year college graduation • From models 3 and 5, found positive relation b/w FC and wage inequality • 10.7% of wage premium according to father’s university-level education

16. Empirical results:Statistical results • Table 2 (cont.): • From model 4 to test interaction b/w father’s education (FC) and elite school graduation(IAoE) • Estimate = -0.375; significant but negative • Counteracting outcome from the other sides of FC and IAoE • IAoE moderates FC on wage inequality, making FC less conspicuous

17. Empirical results:Statistical results • Table 3: Investigating causal relationship between IAoE and FC on wage inequality • 1st stage regression: Elite school graduation  Father’s education • 2nd stage regression: Wage premium  Elite school graduation FC  IAoE  Wage inequality • In benchmark model, IAoE is less significant than that of FC (FC is relatively more important than IAoE)

18. Empirical results: Statistical results • Table 4: Two-stage regression • Examine endogeneity b/w IAE and FC • Father’s education  Elite school graduation (in the left two column), not vice versa (in the right two column) • Integrated outcomes of two-stage regression in Tables 3 & 4 supports Hypothesis 3a (i.e., FC  IAE  Wage premium)

19. Discussion • The effects of institutional arrangement of education (IAoE) and family capital (FC) on social inequality or exclusive social benefits • IAoE side: elite networks, education system, … • FC side: parental education, family influences,… • We find both IAoE and FC affect on individual’s wage level • IAE: elite school graduation • FC: father’s education or relative’s social status • The interaction of IAE and FC yields a negative (-) outcomes on one’s wage inequality • In fact, IAE and FC counteract the effect of the other side’s

20. Discussion • Elite school network in terms of IAoE • Negative view: worse social inequality as a result of exclusive rent-seeking • Positive view: better intergenerational mobility; lessen social inequality • For productive elite school system, • Educational policy to broaden opportunities of education across cohorts of household income and wealth • This could moderate the unproductive effects of FC on intergenerational social inequality • Reference to the British Case: “widening participation” • This attempts to widen access to higher education by increasing number of underrepresented group from lower income families

21. Concluding remarks • The relative influences of FC (father’s education) and IAE (elite school graduation) • In Korea, • parental education (as FC) is the most important factor for intergenerational transfer of income (wealth) • A society with meritocracy based on education

22. Concluding remarks • Supports for social policies that • breaks the cycles of disadvantages across generations; • Social investment in early children in low income households • Child well-being is a key determinant of how much someone will earn in a society with meritocracy based on IAoE • Limitations: • A single country, small sample • A cross-country analysis with a wider time window is desirable • Need more micro-level data on intergenerational income, schooling, labor market practices, and so on.