This paper analyzes the roles of innate talent versus family background in shaping intergenerational mobility and social welfare under different education systems. We establish an overlapping-generations model in which the allocation of workforce between a high-paying skilled labor sector and a low-paying unskilled labor sector depends on talent, parental human capital, and educational resources, and the wage rate of skilled workers is governed by their average talent. Our model suggests that under the private education system, income inequality is inversely associated with social mobility, and the steady-state average talent of skilled labor declines as parents increase educational spending. The introduction of public education, which makes the allocation of workforce depend more on talent and less on family background, tends to increase both inequality and mobility and improve welfare under reasonable conditions. Our simulations show that if the government diverts public school funding to redistribution, the economy has lower inequality and mobility in the steady state. Moving from elitist to meritocratic systems yields lower inequality and greater mobility.
|Number of pages||36|
|Journal||Public Finance Review|
|Early online date||14 Nov 2022|
|Publication status||Published - Jan 2023|
Bibliographical noteWe thank two anonymous referees, an associate editor, and the editor for their valuable comments and suggestions. We also benefit from comments of the participants of the 2020 European Economic Association Congress. All errors are our own.
© The Author(s) 2022.
- innate ability
- private education
- public education
- intergenerational mobility