The impact of education costs on income inequality

Abstract

Reducing education costs is a crucial policy element with broad support in the U.S. However, is lowering the cost of learning a panacea for eliminating income inequality? In this paper, I theoretically examine the relationship between income inequality and the cost of education by building a three-stage overlapping generation model with two sectors and two education systems. In contrast to conventional studies treating education as a unified concept or in hierarchical order, I consider two types of education, each targeting the training of workers for different roles in production. Workers who decide to spend time learning and improving creativity skills can work to produce intermediate goods used in current production and illuminate future production technology. Coders who produce industrial robots are one example of workers who receive this type of education. The other type of education only improves workers’ efficiency and helps them become experts in positions. For instance, office clerks who receive computer training can become more productive in dealing with their daily tasks. I pick a reasonable set of parameters, and the simulation result implies that reducing the cost of practical training may end up enlarging income inequality. The key is whether the effect resulting from the wage gap between jobs (wageeffect) dominates the effect of changing the share of workers in jobs (compositioneffect). Reducing the cost of learning creativity encourages marginal experts to learn creativity and marginal basic workers to receive training, leading to declining wage gaps and income inequality.