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Human Capital Investment, Credentialing, and Wage Differentials

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  • Masashi Tanaka

    (Graduate School of Economics, Osaka University)

Abstract

This study considers how individuals determine the ratio of two kinds of educational investment. One kind contributes to labor skills and the other does not. We refer to the former as human capital investment and the latter as unproductive investment which improves test scores, but has no beneficial effect on students f human capital. We formulate an overlapping generations economy in which the rich and poor invest in both types of education. We argue that the ratio of human capital investment to unproductive investment is a U-shaped function of the wage differentials between the rich and 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 a rapid increase in the level of skill-biased technology may switch the steady state from no inequality to high inequality. Further, it causes a temporary or permanent increase in the ratio of unproductive investment during the transition to the new steady state.

Suggested Citation

  • Masashi Tanaka, 2013. "Human Capital Investment, Credentialing, and Wage Differentials," Discussion Papers in Economics and Business 13-31-Rev., Osaka University, Graduate School of Economics, revised Aug 2017.
    • Handle: RePEc:osk:wpaper:1731r
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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • I24 - Health, Education, and Welfare - - Education - - - Education and Inequality

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