Public Education Financing Systems, Earnings Inequality, and Intergenerational Mobility

Among developed countries there are large and well-documented differences in earnings inequality and intergenerational earnings mobility. Public education financing systems are investigated as a possible source for these cross-country differences. This paper first documents facts about public education in two particular countries, the U.S. and Norway. These countries provide an interesting case study because they have very different earnings distributions and public education systems. An overlapping generations model is calibrated to match U.S. data, and tax and public education spending functions are estimated for each country. The main finding is that taxes and public education spending account for about 15% of differences in earnings inequality and 10% of differences in intergenerational earnings persistence between the U.S. and Norway. Notably, these differences are largely due to changes in the distribution of public education spending rather than average level differences.