Labor Market Returns to Education and Intra-family Educational Inequality: Theory and Experimental Evidence

Abstract

How do labor market conditions shape educational inequality within- and between families? A growing body of evidence documents convex wage returns to education in labor markets across the world. We develop a theoretical model that demonstrates that earnings convexity can increase or decrease between-sibling differences in investments and outcomes depending on the parameter of parental inequality aversion. We recover the distribution of this structural parameter from a highly-incentivized lab-in-the-field experiment with 246 parents in San Luis Potosí, Mexico, in which token allocations determine children's access to an AI course. Parents make allocation decisions across six scenarios that vary convexity in the payoff function and endowment-investment substitutability. We identify three types of parents: Rawlsian parents display perfect inequality aversion (12.6%), interior parents that are moderately inequality tolerant (76.8%), and Utilitarian parents who maximize total payoffs (10.6%). While these three groups respond to earnings convexity in heterogeneous ways, on average, greater convexity increases the share allocated to the high-endowed child, thereby widening within-family inequality.