Academic journal article Federal Reserve Bank of New York Economic Policy Review

Economic Inequality and the Provision of Schooling

Academic journal article Federal Reserve Bank of New York Economic Policy Review

Economic Inequality and the Provision of Schooling

Article excerpt

The school finance landscape has changed dramatically in the past thirty years. Most states have undertaken major changes to their school finance programs, motivated principally by the notion that the unequal school resources associated with unequal incomes and community sorting lead to unequal educational and labor market outcomes. This paper describes the empirical evidence on the relationship between school finance reforms and student outcomes and presents new evidence on the effects of these policies on community and school composition.


During the past several decades, federal and state governments have pursued redistributive policies aimed at fostering "equality of economic opportunity"-the idea that although people's incomes may vary, this variance should be due primarily to factors such as individual ability and effort, not to differences in circumstance. This goal has motivated social welfare policies at both the state and federal levels. Despite decades of redistributive policies, numerous empirical studies (such as Solon [1992], Zimmerman 1992, Corcoran et al. 1992, and Shea 1997]) continue to find evidence of a substantial level of income persistence across generations, even after holding constant many individual characteristics. Shea's findings are particularly compelling, as he contends that only parental income correlated with parental ability (rather than "luck") affects children's future incomes. This finding suggests that cash transfers to parents may have little effect in influencing their children's labor market outcomes.

What might account for this link between parental income and children's income? Many economists believe that this relationship is due in large part to differential human-capital investment between high-income and low-income families. High-income parents can invest in more (and better) education for their children, in a manner that low-income parents cannot, due to credit market imperfections. Since credit markets are imperfect, because parents cannot borrow against their children's future earnings to finance human-capital investment, low-income parents may face binding liquidity constraints and, consequently, may underinvest in their children's human capital (Loury 1981; Becker and Tomes 1986; Mulligan 1995). This is only one possible explanation, however, and may carry less weight given Shea's finding that parental money per se does not matter in determining their children's outcomes.

The persistence of income inequality, together with the existence of market imperfections that may help perpetuate this inequality, has motivated policymakers to explore various options designed to make opportunities more equal. Many in the policy arena have suggested that opportunities could be further equalized via the implementation of changes in the system of school finance that make education spending more equal. This argument is bolstered by substantial evidence that premarket factors play a significant role in determining subsequent labor market outcomes (see, for example, Neal and Johnson 1996] and Bishop 1989). Hence, school finance reforms could serve, to some degree, to sever the link between parental income and the human capital accumulation that leads to improved outcomes of their children.

Thus, the goal of fostering increased income mobility through equality of economic opportunity is a major motivation of the dozens of recent school finance reforms, either court-ordered or enacted by legislative edict. These policies have experienced a resurgence in the last several years, with state supreme court decisions mandating equalization in states such as Kentucky, Texas, Vermont, and New Hampshire, further altering a school finance landscape that has changed dramatically since 1970.

The best available evidence on the impact of these major finance reforms, and of other lesser changes in the systems of school finance in the individual states, supports the conclusion that these reforms have reduced withinstate inequality in education spending (Murray, Evans, and Schwab 1998) by weakening the link between school district property wealth and spending. …

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