Teachers and the Evolution of Aggregate Inequality

Teachers account for less than 5% of the workforce but have disproportionate impacts on the achievements of future generations. This paper studies how the reward structure of teachers affects income inequality at the aggregate level. I show that, in a dynamic environment, there is a two-way relationship between teacher quality and population-wide human capital distribution. On the one hand, the dispersion of human capital governs the occupation selection effect on teacher quality. On the other hand, deteriorating teacher quality elevates the dispersion itself through children’s human capital formation. Exploiting empirical evidence on duty-to-bargain laws, I identify the model in closed form and quantify the proposed mechanism. Counterfactual results suggest that rewarding teachers’ human capital, e.g., through performance-based compensations, has large dynamic spillover effects such as reducing aggregate income inequality and boosting intergenerational mobility.