How Responsive Is Investment in Schooling to Changes in Redistributive Policies and in Returns?

Abstract

This paper uses an unusual pay reform to test the responsiveness of investment in schooling to changes in redistribution schemes that increase the rate of return to education. We exploit an episode where different Israeli kibbutzim shifted from equal sharing to productivity-based wages in different years and find that students in kibbutzim that reformed earlier invested more in education. This effect is stronger for males and is mainly driven by students whose parents have lower levels of education. Our findings support the prediction that education is highly responsive to changes in the redistribution policy, especially for students from weaker backgrounds.

The Effect of Changes in the Skill Premium on College Degree Attainment and the Choice of Major

“…For example, bequests were not allowed, and members could not take their share of the assets of the kibbutz with them. Moreover, Abramitzky and Lavy (2014) show that exit rates during the period we study were relatively low and nearly identical in kibbutzim that reformed early and late.…”

“…This pattern holds for both men and women. Abramitzky and Lavy (2014) also show that the pay reform was highly salient to members as it has been the most discussed topic in kibbutzim since its start, being hotly debated and voted on by members in kibbutzim. Upon implementation, kibbutz members received detailed information about the new sharing rule and about the link between earnings and productivity and the role played in this regard by market forces.…”

“…An important point to emphasize is that throughout the period we study, from late 1990's to date, adults in kibbutzim made free educational choices. Abramitzky and Lavy (2014) show that the move from equal wages to differential pay signaled strongly to members in kibbutzim an increase in the monetary rate of return to schooling by introducing productivity-related wage differences within a kibbutz for the first time. The change was from a near zero rate of return to a postreform return similar to the rest of Israel, which is estimated by various studies at about 8% per year of schooling (Frish, 2007).…”

“…The Institution for the Research of the Kibbutz and the Cooperative Idea, University of Haifa, publishes reports about the dates in which the pay reform started in each kibbutz. This data was also used in Abramitzky and Lavy (2014) and it allows us to sort the kibbutzim into early and late reformers.…”

“…We show evidence that these two groups (the treatment and control group) were indistinguishable in both their observable background characteristics and their pre-reform academic outcomes. A similar identification strategy used by Abramitzky and Lavy (2014) showed that the increase in the returns to schooling induced high school students to improve their high school and matriculation achievements.…”