Human Capital and Inequality in Canada

Kelly Foley
University of Saskatchewan
David A. Green
Vancouver School of Economics and IFS
February 24, 2014
Inequality in Canada Driving Forces, Outcomes and Policy Human Capital
Introduction
1
Describe recent Canadian trends in education and inequality
Using LFS 1997-2013 and Census 1981-2001
2
What impact does education have on the wage structure?
Technology, skills and occupational-tasks
3
What is the potential impact of policy?
Inequality in Canada Driving Forces, Outcomes and Policy Human Capital
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1980 1985 1990 1995 2000 2005 2010
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Women Ages 25!34
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1980 1985 1990 1995 2000 2005 2010
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Men Ages 25!34
Education Shares
Census: Less than H.S. Census: H.S. Census: College Census: BA Census: Graduate
LFS: Less than H.S. LFS: H.S. LFS: College LFS: BA LFS: Graduate
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1980 1985 1990 1995 2000 2005 2010 2015

Employed Women Ages 25!34
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1980 1985 1990 1995 2000 2005 2010 2015

Employed Men Ages 25!34
Education Premia (Relative to High School Graduates)
LFS: Less than H.S. LFS: College LFS: BA LFS: Grad degree
LFS: Less than H.S. Census: College Census: BA Census: Grad degree
Table : Ln Weekly Wage Gaps Men Ages 25-34 (LFS Estimates)
2013
Canada East Ont/PQ West
Mean Ln Wage, HS graduates 6.433*** 6.285*** 6.353*** 6.549***
(0.010) (0.028) (0.015) (0.014)
Wage gaps:
Less than HS -0.106*** -0.041 -0.123*** -0.030
(0.021) (0.064) (0.031) (0.033)
College 0.145*** 0.310*** 0.153*** 0.169***
(0.012) (0.036) (0.019) (0.019)
Bachelor Degree 0.176*** 0.261*** 0.250*** 0.078***
(0.014) (0.042) (0.022) (0.021)
Graduate Degree 0.241*** 0.393*** 0.311*** 0.151***
(0.020) (0.059) (0.028) (0.035)
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1980 1985 1990 1995 2000
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Employed Men Ages 25!34 (Census)
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1980 1985 1990 1995 2000
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Employed Women Ages 25!34 (Census)
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1997 2002 2007 2012
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Employed Men Ages 25!34 (LFS)
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1997 2002 2007 2012
year
Employed Women Ages 25!34 (LFS)
Between and Within Group Variance Ln Weekly Wages
Total Variance Within Var Between Var
Link between Human Capital and Inequality:
Skill-biased technical change
Skill-biased technical change
e.g. Katz & Murphy, 1992; Autor, Katz, & Krueger, 1998; Card &
Lemieux, 2001
Computer revolution increases productivity of and demand for
skilled workers
Race between education and technology
Implies that increasing education will reduce inequality
Does not t Canadian data in the recent periods well
Returns to education and supply of education rising at the same
time
Inequality in Canada Driving Forces, Outcomes and Policy Human Capital
Link between Human Capital and Inequality:
Technological change and demand for occupational tasks
Technology adoption occurs in response to supply of skilled
workers:
In Beaudry & Green (2005) rms switch from old
technology/unskilled workers to new techologies/skilled workers
Technology changes demand for particular tasks:
e.g. Acemoglu & Autor 2011
Falling demand for routine-task occupations leads to polarization
Consistent with the pre-2000 period (Green & Sand 2014), but
not the post-2000 period
Inequality in Canada Driving Forces, Outcomes and Policy Human Capital
Link between Human Capital and Inequality:
Demand reversal and resource booms
Resource booms in key regions
Relative wages fall among university educated in the resource-rich
regions
Low-skilled workers are relatively scarce in the booming areas
Demand reversal
Demand for high skilled workers falls as investment stage is
completed (Beaudry, Green and Sand 2013)
Highly educated workers compete for jobs lower on the
occupational structure
Fractions of university graduates working in highest paying
occupations declines between 2000-2008
Inequality in Canada Driving Forces, Outcomes and Policy Human Capital
Impact of Human Capital Policy: Childhood-targeted policy
Targeted early education:
Long-run positive eects on crime, education and earnings (Garces et al 2002,
Baker 2011)
Persistent eects are associated with non-cognitive rather than cognitive skills
(Heckman et al. 2010)
Universal child care
Some negative behavioural impacts (Havnes & Mogstad 2010, Baker 2011)
Positive eects concentrated among disadvantaged children (Havnes &
Mogstad 2010, Baker 2011)
Increasing income among low-income families
Improves cognitive scores pro-social behaviour and educational attainment
(Milligan & Stabile 2011)
Inequality in Canada Driving Forces, Outcomes and Policy Human Capital
Childhood-targeted policy: Implications for inequality
Eect of increasing the propensity to attend university among
low-income children depends on whether:
Additional graduates end up in service and clerical jobs
Compete down median wages and increase inequality
Additional graduates are high ability and compete for higher paying
occupations
Compete down high wages and reduce inequality
Eect of increasing non-cognitive skills among the less
advantaged:
Allow less advantaged people to access middle-paying occupations
Reduce the gap between median and low earnings
Increase competition for middle paying jobs, lowering wages
Increase the gap between median and high earnings
Inequality in Canada Driving Forces, Outcomes and Policy Human Capital
Impact of Human Capital Policy:
Policies related to University education
Public funding/subsidized tuition:
Children from families with higher incomes more likely to attend university
(Belley, Frennette, and Lochner, forthcoming), which suggests they benet
relatively more
Grants and loans
Compared to the U.S., Canadian aid programs are relatively generous to
middle-income families (Belley, Frennette, and Lochner, forthcoming)
Eliminating aid would substantially increase family income-PSE attendance
gaps
Savings-based policies (RESP)
Most heavily used by higher income families (Milligan 2005)
Only 15 % of eligible children used Canada Learning Bonds (Essaji and Neil
2012)
Inequality in Canada Driving Forces, Outcomes and Policy Human Capital
Policies related to University education: Implications for
inequality
Eect of reducing tuition or increasing aid depends on whether
family-income gradient results from credit constraints
If the important barriers not are nancial,
New attendees likely to be drawn from middle and higher income families with
lower average ability
Will increase competition for middle paying jobs
Push lower skilled individuals down the occupational ladder
If other policies can successfully target lower income children,
Tap into a new pool of talent
Will increase competition for higher paying jobs
Decrease gap between median and higher incomes.
Inequality in Canada Driving Forces, Outcomes and Policy Human Capital
Conclusion
Expanding educational spending, particularly at the university
level, can not be relied upon as a singular antidote to inequality
Empirical relationship between education and inequality is not
strong
When demand for high-skilled workers is stable or falling:
Important distinction between whether policies increase competition
for middle-paying versus higher-paying occupations
Inequality in Canada Driving Forces, Outcomes and Policy Human Capital