DP10433 | Social background, education and inequality

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22/02/2015

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Abstract

The role of social background for educational choices and outcomes is considered in an overlapping generations setting. It is shown that the impediments for education created by social factors are similar to a market imperfection, and publicly provided education may lead to a Pareto improvement. Policies affecting the share of skilled release a dynamic adjustment process via the change in the social background of youth. An increase (decrease) in the share of skilled thus has a cumulative effect over time increasing (decreasing) the share of skilled further. Active and passive means of redistribution thus differ both in the impact and long-run effects. Passive redistribution benefits non-skilled on impact but increases their share over time, while active redistribution does not benefit the non-skilled on impact (but their children) but leads to more skilled over time. It is an implication that a large "active" public sector may lead to higher income and less inequality than a more "passive" public sector.