Public Education and Wage Inequality

Abstract

In this paper, we analyze the relationship between public education and wage inequality. In public education systems, all students receive the same amount of education, so it is generally thought that the system equalizes wages among workers. Then, does the expansion of public education reduce wage inequality? In a two sector model where agents choose their occupation based on comparative skill advantages, we show that the expansion of public education increases wage inequality. The economy has two types of commodities, goods for consumption and educational services that have different values of skill elasticity in production. In addition, there are high and low skilled workers. As the skill elasticity of educational services is higher than goods for consumption, skilled workers choose to work at producing educational services and unskilled workers choose to work at producing goods for consumption. When the government increases the supply of education, the relative price of education varies and the demand for skilled workers increases so wage inequality increases.We also analyze the effect of public education and tax rate on the growth rate and derive the optimal tax rate to maximize this growth rate.JEL Classification: I28, O15, O41