The Long-Term Spillover Effects of Changes in the Return to Schooling

We study the spillover effects of a pay reform that substantially increased the returns to schooling in kibbutzim, socialist-oriented communities in Israel. In the late 1990s, kibbutzim reformed their decades-long policy of equal income sharing to one of market-based wages. We show that this reform, which induced kibbutz students to improve their academic achievements during high school, spilled over to non-kibbutz members who attended the same schools. In the short run, peers improved their high school outcomes and shifted to courses with higher financial returns. In the long run, peers completed more years of post-secondary schooling and increased their earnings.