The Graduate Tax when Education is a Signal
Myles, Gareth D.; Ismail, R
Date: 29 July 2015
Journal
Research in Economics
Publisher
Elsevier
Publisher DOI
Abstract
This paper investigates the effects of a graduate tax when the return to education is uncertain and wages are determined through equilibrium in a labor market with signalling. The consequence of uncertainty is that both ability and initial wealth matter for educational choice. Compared to a constrained first-best the market outcome ...
This paper investigates the effects of a graduate tax when the return to education is uncertain and wages are determined through equilibrium in a labor market with signalling. The consequence of uncertainty is that both ability and initial wealth matter for educational choice. Compared to a constrained first-best the market outcome with uncertainty and signalling results in an inefficiently high number of people entering higher education. Due to the positive wealth effect over-entry is proportionately greater for high-wealth individuals. The graduate tax reduces entry into education so enhances efficiency. However, it has undesirable distributional consequences: low-wealth individuals are deterred from entering education but high-wealth are encouraged. In this respect, the graduate tax has clear failings as a method of financing higher education.
Economics
Faculty of Environment, Science and Economy
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