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Trade, Income Inequality, and Government Policies: Redistribution of Income or Education Subsidies?

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  • Eckhard Janeba
Abstract
This paper explores the role of government policies in a situation where the wage gap between high-skilled and low-skilled workers is widening due to increasing foreign competition in the manufacturing of low-skilled intensive goods. A two-period, two-sector general equilibrium model of a small open economy is developed in which individuals choose whether to invest in skills or not. The government influences individual decision-making by redistribution of income or by subsidizing investment in skills. Both types of policies have complicated effects on income inequality and social welfare. The first policy discourages investment in skills while the latter, although successful in inducing more investment in skills, tends to be regressive by favoring those who acquire skills. Yet for a given income tax rate the Lorenz curves of the two different policies intersect. When the government maximizes social welfare education subsidies are useful only if there is a high degree of inequality aversion and financing the subsidy is not too distortive.

Suggested Citation

  • Eckhard Janeba, 2000. "Trade, Income Inequality, and Government Policies: Redistribution of Income or Education Subsidies?," NBER Working Papers 7485, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:7485
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    Cited by:

    1. Rossana Patron & Marcel Vaillant, 2012. "Can Education Policy Address The Wage Gap? A Note On Public Skill Formation In Developing Countries," Journal of International Development, John Wiley & Sons, Ltd., vol. 24(3), pages 369-378, April.
    2. Ben Mimoun Mohamed, 2005. "Redistribution Through Education and Other Mechanisms Under Capital‐Market Imperfections and Uncertainty: A Welfare Effect Analysis," LABOUR, CEIS, vol. 19(2), pages 191-236, June.
    3. Spiros Bougheas & Raymond Riezman, 2013. "Trade and the distribution of human capital," World Scientific Book Chapters, in: Raymond Riezman (ed.), International Trade Agreements and Political Economy, chapter 20, pages 395-407, World Scientific Publishing Co. Pte. Ltd..
    4. Eckhard Janeba, 2003. "Does Trade Increase Inequality when Skills are Endogenous?," Review of International Economics, Wiley Blackwell, vol. 11(5), pages 885-898, November.
    5. Spiros Bougheas & Richard Kneller & Raymond Riezman, 2011. "Optimal Education Policies And Comparative Advantage," Pacific Economic Review, Wiley Blackwell, vol. 16(5), pages 538-552, December.
    6. Deven Bansod & Geetilaxmi Mohapatra & A. K. Giri, 2017. "Fiscal Policy, Economic Growth and Income Inequality: A Case of Indian Economy," Romanian Economic Journal, Department of International Business and Economics from the Academy of Economic Studies Bucharest, vol. 20(63), pages 72-88, March.
    7. Gibson, Bill, 2005. "The transition to a globalized economy: Poverty, human capital and the informal sector in a structuralist CGE model," Journal of Development Economics, Elsevier, vol. 78(1), pages 60-94, October.

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    More about this item

    JEL classification:

    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue

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