people and planet

2
jobs and decent earnings, even in low and middle income
countries This trend is reinforced by job polarization and
by the rise of the service sector in the context of rapid
technological change and continued globalization.
Equitable education expansion over 2015–2030,
especially at the secondary and post-secondary levels
could help reverse the trend of widening income
inequality within countries. Educated people, at all levels
of education, receive a substantial payoff in individual
earnings (Montenegro and Patrinos, 2014), meaning
education reforms can be important in reducing income
inequality and earnings disparities between groups.
Furthermore, improving education outcomes among
disadvantaged groups can improve intergenerational
social and income mobility (OECD, 2012).
Generally, to tackle income inequality, education should
be expanded and its provision equally distributed.
Historical evidence suggests unequal distribution in
educational attainment contributes to unequal income
distribution (Birdsall and Londoño, 1997; Gregorio and
Lee, 2002; Lundberg and Squire, 2003), while higher levels
of education, in terms of both quality and quantity,
positively affect growth in the income share of the poor
(Gundlach et al., 2004). A meta-analysis of 64 empirical
studies found that education – based on measures such
as years of schooling and education expenditure – is
significantly associated with an increased income share
of the poor and a reduced income share of the rich.
Effects were particularly strong for secondary school
expansion, and for education expansion generally in
Africa (Abdullah et al., 2015).
While reporting an overall positive effect, the metaanalysis
cited above found that education was associated
with increased inequality in a large number of studies
(Abdullah et al., 2015). In the United States, it is estimated
that moving 10% of non-college-educated males to a
degree-level education
would have little impact
on overall inequality 5 ,
Where education is mainly because many
unequally distributed benefits would shift to
the upper end of the
and not effectively
income distribution
aligned with labour (Hershbein et al., 2015).
market designs, it can
reinforce inequality
The overall effect of
education expansion
on income inequality
(before taxes and transfers) is ultimately determined by
changes in the education distribution between levels of
education; differences in labour market returns between
(and within) these levels; 6 and whether the education
expansion reduces differences in wages between
education levels.
The dynamics of education expansion are commonly
understood in terms of two sometimes contradictory
processes – the composition effect and the compression
effect (Gregorio and Lee, 2002; Knight and Sabot,
1983). The former, through increases in the incomes of
beneficiaries, changes income distribution, and in theory
can either increase or decrease inequality. For example,
on this basis, education expansion in which beneficiaries
increase their incomes significantly above average wages
(e.g. expanding tertiary education in a country in which
only a small proportion of the population has tertiary
education) can be expected to increase inequality, all else
being equal. On the other hand, education expansion in
which a disadvantaged group increases its income to
closer to the national average (e.g. moving to universal
secondary attainment where attainment is relatively
widespread) can be expected to lower inequality. Hence,
the composition effect of education expansion at a given
level of education tends to increase inequality initially,
as more people attain higher income, then lower it over
time, as fewer low income people remain.
At the same time, a compression effect takes place when
the increased supply of workers with a given level of
education exceeds the demand for them. This pushes
wages down relative to the less educated. So while
the composition effect can work to either increase
or decrease inequality, the compression effect works
to lower inequality. All else being equal, the effect of
education expansion on earnings inequality depends
on the net composition and compression effect. If,
for example, a higher education expansion led to a
compositional change – which would in theory widen the
income distribution – this would have to be outweighed
by a subsequent compression effect across higher
education graduates in order to decrease inequality.
Given uncertainty of the future returns between and within
various levels of education and labour market demand,
accurately estimating the net composition and compression
effects of an education reform in advance is challenging.
Education should therefore be viewed as a potential
equalizing mechanism, but not as the sole solution to
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CHAPTER 2 | PROSPERITY: SUSTAINABLE AND INCLUSIVE ECONOMIES