Does the College Tuition Regulation in Korea Improve Social Welfare?
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Since 2009, Korea’s college tuition regulation has reduced tuition by more than 20% in real terms. This paper examines the welfare effects of tuition regulation using a model of education choices depending on ability and wealth. College is costly but improves productivity and job prospects, whereas high school is free but has no benefits. If firms can observe workers’ abilities, tuition regulation can benefit most people because it makes college more affordable. However, if only workers can observe their ability, the welfare gain can be counteracted by the reduction in wages due to changes in education choices. In the simulated model, a 20% tuition reduction hurts approximately 90% of the population if only workers know their abilities. In contrast, it benefits more than 80% of the population if firms can also observe workers’ abilities. These findings suggest that tuition regulation may require complementary policies to facilitate the evaluation of workers’ abilities.
Abstract
Since 2009, Korea’s college tuition regulation has reduced tuition by more than 20% in real terms. This paper examines the welfare effects of tuition regulation using a model of education choices depending on ability and wealth. College is costly but improves productivity and job prospects, whereas high school is free but has no benefits. If firms can observe workers’ abilities, tuition regulation can benefit most people because it makes college more affordable. However, if only workers can observe their ability, the welfare gain can be counteracted by the reduction in wages due to changes in education choices. In the simulated model, a 20% tuition reduction hurts approximately 90% of the population if only workers know their abilities. In contrast, it benefits more than 80% of the population if firms can also observe workers’ abilities. These findings suggest that tuition regulation may require complementary policies to facilitate the evaluation of workers’ abilities.
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