Trade, Income Inequality, and Government Policies: Redistribution of Income or Education Subsidies?

36 Pages Posted: 11 Apr 2000 Last revised: 10 Apr 2001

See all articles by Eckhard Janeba

Eckhard Janeba

University of Mannheim - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: January 2000

Abstract

This paper explores the role of government policies in a situation where the wage gap between high-skilled and low-skilled workers is widening due to increasing foreign competition in the manufacturing of low-skilled intensive goods. A two-period, two-sector general equilibrium model of a small open economy is developed in which individuals choose whether to invest in skills or not. The government influences individual decision-making by redistribution of income or by subsidizing investment in skills. Both types of policies have complicated effects on income inequality and social welfare. The first policy discourages investment in skills while the latter, although successful in inducing more investment in skills, tends to be regressive by favoring those who acquire skills. Yet for a given income tax rate the Lorenz curves of the two different policies intersect. When the government maximizes social welfare education subsidies are useful only if there is a high degree of inequality aversion and financing the subsidy is not too distortive.

Suggested Citation

Janeba, Eckhard, Trade, Income Inequality, and Government Policies: Redistribution of Income or Education Subsidies? (January 2000). NBER Working Paper No. w7485. Available at SSRN: https://ssrn.com/abstract=210929

Eckhard Janeba (Contact Author)

University of Mannheim - Department of Economics ( email )

L7, 3-5
D-68131 Mannheim
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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