Does Income Inequality Lead to Education Inequality?
A Cross Sectional Study of Pakistan
Abstract
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When firms do not know which labor is capable of efficient work, then paying all employees their average product as wage seems a feasible option. This simplest of ways discourages good workers and makes bad workers costly. Spence proposed to use educational attainment as the indicator of the labor force's capability to solve this problem. Since workers are randomly distributed in terms of their ability, Akerlof would lead us to believe that the level of educational attainment should be proportional to the individual's ability, which is not valid, practically. This study strives to find the determinants of educational inequality, where income inequality of the household is the prime suspect, and other indicators include gender, household size, and age. GMM instrumental variable approach was used to study the effect of income inequality on educational inequality. The results showed that it is income inequality, which restricts people from attaining higher education.
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