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Journal of Quantitative Economics

, Volume 16, Issue 2, pp 553–571 | Cite as

Skill Formation, Public Expenditure on Education and Wage Inequality: Theory and Evidence

Original Article

Abstract

As per the conventional wisdom there should be provision for public assistance for skills acquirement for improving relative wage inequality in the future. Empirical observations on some prominent small OECD countries, however, indicate that the relationship between wage inequality and public spending on education is not necessarily unambiguous. A theoretical underpinning of this empirical observation has been provided in this study in terms of a \(2\times 3\) general equilibrium model for a small open economy. Later, the correctness of the theoretical framework and its result have been empirically examined with the help of an unbalanced panel dataset of 13 small developed countries from 2000 to 2011. This empirical analysis supports the main theoretical result that the relationship between wage inequality and public expenditure could indeed be ambiguous. This finding questions the desirability of providing subsidy on education at least from the perspective of reduction in earnings inequality among the different sections of the working population.

Keywords

Skill formation Wage inequality Education subsidy General equilibrium Small OECD country Panel data 

JEL Classification

D58 I24 I28 J31 

Notes

Acknowledgements

The authors are thankful to two anonymous referees of the journal for their highly interesting and constructive comments on an earlier version of the paper. The usual disclaimer, however, applies.

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Copyright information

© The Indian Econometric Society 2017

Authors and Affiliations

  1. 1.Spring Hill CollegeMobileUSA
  2. 2.Department of EconomicsUniversity of CalcuttaKolkataIndia

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