Tuesday, March 09, 2010

Inequality and Education

Recently I've read the latest Mankiw's article and wondered how to solve an income (or opportunity) inequality. Not only has this problem been considered important in the US, but also in Japan.

Since around 1970s, the age of oil and dollar crisis, an income inequality has been wider in some developed countries and especially since late 1990s, when IT(information technology) revolution, the Internet, came across and changed our everyday business and life, we've got concerned about what is called "digital divide", which means that those who use IT are more likely to get higher income than those who don't.

"Kakusa society", in Japanese, means "income-gap society" and is now a well known word to a lot of modern Japanese people. Income gap leads to a wider opportunity gap; Those who get higher income are more likely to have good friends and spouses and live a better and happier life, and thus so are their children.

When Gary Becker & Kevin Murphy talk about the income inequality, they point out the role of "human capital" played in an income gap:

The initial impact of higher returns to human cap­ital(Taro added: a higher education of college and university) is wider inequality in earnings.

...Higher returns to educa­tion will accelerate growth in living standards as existing investments have a higher return, and additional investments in education will be made in response to the higher returns.

Why is the earnings gap widening? Because (of) the demand for educated and other skilled persons (and) ...a general shift in economic activity to more edu­cation-intensive sectors, such as finance and professional services... At the same time, world demand has risen for the kinds of products and services that are provided by high-skilled employees.

They tell us that initial impact of higher education on income widens income gap, but as time goes by, it decreases and leads to higher income and benefit spilled over more people. Moreover, they criticize the usual policy response to an income inequality:

...the solution to an increase in inequality is ...to raise taxes on high-income households and reduce taxes on low-income households. .. (That is just like advocating) a tax on going to college and a subsidy for dropping out of high school in response to the increased importance of education.

They suggest that we should encourage higher education for more people. I completely agree with them.


Anonymous said...

my name's ewi...
from indonesia...Math faculty of UGM..
the last articles, you said that u'r interested in Hamilton jacobi bellman equation...

right now, I really need information about that equation...
I've looked for "free paper" in internet, but I still can't understand.

Could you tell me ?
just info, I'm doing my thesys about that equation.

thx for reply

Taro said...

Thx for your question!

Keep in mind I am an economist, so I am not sure whether it is helpful, but please go to the site Maurice Obstfeld, econ of UC Berkeley,
"Dynamic Optimization in Continuous-Time Economic Models (A Guide for the Perplexed)," 1992 working paper. This paper is in two parts. 1st part and 2nd part]