Education Vouchers, Growth and Income Inequality

Abstract

This paper uses a growth model with public and private education alternatives to investigate the implications of education vouchers for economic growth and the evolution of income inequality. The results indicate that introducing education vouchers can increase economic growth. Families that switch from public to private education due to vouchers experience higher incomes, leading to growth in the tax base which in turn raises public education expenditures and increases the growth of the whole economy. Vouchers have an ambiguous effect on income inequality. Gini coefficients indicate increased inequality while other measures indicate decreased inequality. Comparing income distributions using generalised Lorenz curves, the distribution under a voucher scheme dominates the distribution without vouchers. This implies that in the long run, vouchers offer a welfare improvement. In short run welfare comparisons however, more than half the population is worse off with vouchers, which is consistent with repeated failures of voucher referenda in the US. The results add a new dimension on which vouchers can be evaluated in the continuing policy debate.