School heterogeneity, human capital accumulation, and standards

Abstract

This paper examines the effects of heterogeneity in school quality on high school wages, college enrolment rates and social surplus. Greater heterogeneity in school quality, combined with pooling on the labor market for high school graduates, is shown to result in lower average high school wages, inefficient college-going decisions, and, in some cases, lower social surplus. These effects of heterogeneity tend to be reinforced by technical change which raises the return to human capital. Technical change leads to bigger increases in the college-high school wage ratio when there is more underlying heterogeneity in the school system. Performance standards implemented through the mandatory testing of all high school graduates are shown to raise average high school wages and social surplus by reducing the distortion in college-going incentives.