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Human capital investment, Signaling, and Wage differentials

  • Masashi Tanaka

    ()

    (Graduate School of Economics, Osaka University)

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    In the real world, two types of education investment may exist. One of these contributes to labor skills, and the other does not, corresponding to human capital and signal invest- ment, respectively. The question is how individuals determine the ratio of these alternative investments. In response, we formulate an overlapping generations economy where the rich and the poor invest in both types of education. We argue that the ratio of human capital to signal investment is a U-shaped function of the wage differentials between the rich and the poor. Moreover, we identify three patterns of stable steady states for these wage differentials, namely, no-inequality, high-inequality, and multiple steady states. Using these results, we conclude that exogenous factors, such as skill-biased technical change, may switch the steady state from no-inequality to high-inequality, and as a result, the ratio of human capital to signal investment changes in a U-shaped form during the transition to the new steady state.

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    File URL: http://www2.econ.osaka-u.ac.jp/library/global/dp/1331.pdf
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    Paper provided by Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP) in its series Discussion Papers in Economics and Business with number 13-31.

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    Length: 27 pages
    Date of creation: Dec 2013
    Date of revision:
    Handle: RePEc:osk:wpaper:1331
    Contact details of provider: Web page: http://www.econ.osaka-u.ac.jp/
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    1. William Blankenau & Gabriele Camera, 2009. "Public Spending on Education and the Incentives for Student Achievement," Economica, London School of Economics and Political Science, vol. 76(303), pages 505-527, 07.
    2. Koichi Futagami & Shingo Ishiguro, 2004. "Signal-extracting education in an overlapping generations model," Economic Theory, Springer, vol. 24(1), pages 129-146, 07.
    3. Ana M. Ferrer, 2005. "Signalling, Inequality and the Social Structure," Economica, London School of Economics and Political Science, vol. 72(3), pages 515-529, 08.
    4. David H. Autor & Lawrence F. Katz & Alan B. Krueger, 1997. "Computing Inequality: Have Computers Changed the Labor Market?," NBER Working Papers 5956, National Bureau of Economic Research, Inc.
    5. Costrell, Robert M, 1994. "A Simple Model of Educational Standards," American Economic Review, American Economic Association, vol. 84(4), pages 956-71, September.
    6. Betts, Julian R, 1998. "The Impact of Educational Standards on the Level and Distribution of Earnings," American Economic Review, American Economic Association, vol. 88(1), pages 266-75, March.
    7. Spence, A Michael, 1973. "Job Market Signaling," The Quarterly Journal of Economics, MIT Press, vol. 87(3), pages 355-74, August.
    8. Eric A. Hanushek, 2002. "The Failure of Input-based Schooling Policies," NBER Working Papers 9040, National Bureau of Economic Research, Inc.
    9. Oded Galor & Omer Moav, 1998. "Ability Biased Technological Transition, Wage Inequality, and Economic Growth," Working Papers 98-14, Brown University, Department of Economics.
    10. William Blankenau & Gabriele Camera, 2006. "A Simple Economic Theory of Skill Accumulation and Schooling Decisions," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 9(1), pages 93-115, January.
    11. Dan Andrews & Andrew Leigh, 2008. "More Inequality, Less Social Mobility," CEPR Discussion Papers 566, Centre for Economic Policy Research, Research School of Economics, Australian National University.
    12. Spence, Michael, 1974. "Competitive and optimal responses to signals: An analysis of efficiency and distribution," Journal of Economic Theory, Elsevier, vol. 7(3), pages 296-332, March.
    13. Acemoglu, D., 1997. "Why Do New Technologies Complement Skills? Directed Technical Change and Wage Inequality," Working papers 97-14, Massachusetts Institute of Technology (MIT), Department of Economics.
    14. John H. Tyler & Richard J. Murnane & John B. Willett, 2000. "Estimating The Labor Market Signaling Value Of The GED," The Quarterly Journal of Economics, MIT Press, vol. 115(2), pages 431-468, May.
    15. Bergh, Andreas & Fink, G√ľnther, 2009. "Higher education, elite institutions and inequality," European Economic Review, Elsevier, vol. 53(3), pages 376-384, April.
    16. Sanghoon Lee, 2007. "The Timing Of Signaling: To Study In High School Or In College?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 48(3), pages 785-807, 08.
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