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Higher education and the fall and rise of inequality

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  • Prettner, Klaus
  • Schäfer, Andreas

Abstract

We investigate the effect of higher education on the evolution of inequality. In so doing we propose a novel overlapping generations model with three social classes: the rich, the middle class, and the poor. We show that there is an initial phase in which no social class invests in higher education of their children such that inequality is driven by bequests. Once a certain income threshold is surpassed, the rich start to invest in higher education of their children, which partially crowds out bequests and thereby reduces income inequality and inheritance flows in the short run. The better educated children of the rich, however, enjoy higher incomes such that inequality starts to rise again. As time goes by, the middle class and potentially also the poor start to invest in higher education. As the economy proceeds toward a balanced growth path, educational differences between social groups and thus inequality decline again. We argue that (1) the proposed mechanism has the potential to explain the U-shaped evolution of income inequality and inheritance flows in rich countries as well as the differential investments in higher education by richer and poorer households, (2) the currently observed increase in inequality is likely to level off in the future.

Suggested Citation

  • Prettner, Klaus & Schäfer, Andreas, 2016. "Higher education and the fall and rise of inequality," Hohenheim Discussion Papers in Business, Economics and Social Sciences 19-2016, University of Hohenheim, Faculty of Business, Economics and Social Sciences.
  • Handle: RePEc:zbw:hohdps:192016
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    References listed on IDEAS

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    More about this item

    Keywords

    Higher education; inequality; growth regime switch; middle income trap; Piketty curve;

    JEL classification:

    • I23 - Health, Education, and Welfare - - Education - - - Higher Education; Research Institutions
    • I24 - Health, Education, and Welfare - - Education - - - Education and Inequality
    • I25 - Health, Education, and Welfare - - Education - - - Education and Economic Development
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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