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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.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7485.

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Date of creation: Jan 2000
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Handle: RePEc:nbr:nberwo:7485

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  1. Robert C. Feenstra & Gordon H. Hanson, 1996. "Globalization, Outsourcing, and Wage Inequality," NBER Working Papers 5424, National Bureau of Economic Research, Inc.
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  7. Raquel Fernandez & Richard Rogerson, 1994. "On the political economy of education subsidies," Staff Report, Federal Reserve Bank of Minneapolis 185, Federal Reserve Bank of Minneapolis.
  8. Joel Slemrod, 1995. "Involvement, Prosperity, and Economic Growth?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 26(2), pages 373-431.
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Cited by:
  1. Spiros Bougheas & Richard Kneller & Raymond Riezman, 2011. "Optimal Education Policies And Comparative Advantage," Pacific Economic Review, Wiley Blackwell, Wiley Blackwell, vol. 16(5), pages 538-552, December.
  2. Bougheas, Spiros & Riezman, Raymond, 2007. "Trade and the distribution of human capital," Journal of International Economics, Elsevier, Elsevier, vol. 73(2), pages 421-433, November.
  3. 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, Elsevier, vol. 78(1), pages 60-94, October.
  4. Mohamed Ben Mimoun, 2004. "Redistribution Through Education and Other Mechanisms Under. Capital-Market Imperfections and Uncertainty : A Welfare Effect Analysis," Cahiers de la Maison des Sciences Economiques, Université Panthéon-Sorbonne (Paris 1) bla04110, Université Panthéon-Sorbonne (Paris 1).

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