Higher Education Tuition Fees and Socio-Economic Inequality

Rising socio-economic inequality is one of the most important politico-economic challenges of our time. Accordingly, a huge literature has investigated economic, political, and social determinants of various types of inequality. The paper argues that despite decent progress one important factor has been entirely disregarded: higher education tuition fees. In order to pay back tuition-related student debt and in order to be rewarded for their risky investment in education, graduates who paid considerable tuition fees will demand larger wage premiums. Higher education wage premia, in turn, manifest in higher wage inequality. Empirically, the impact of tuition fees is tested by applying time-series cross-sectional regressions to data on wage premiums and on wage inequality in the advanced economies over the last two decades. Moreover, in order to address concerns of potential endogeneity, a natural experimental design complements the analysis: I exploit the fact that England introduced tuition fees whereas Scotland remained tuition-free; thus, we should observe larger wage premium and inequality increases in England than in Scotland. Furthermore, several micro-level implications of the model will be tested using ISSP survey data over more than two decades. In particular, I analyze whether increasing tuition fees and student debt changes the public’s perception of the fairness of higher education wage premiums: The higher tuition is, the higher the public acceptance of education-related wage premiums. Tuition fees thus help to explain the rises in and persistence of inequalities.