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

  • Anindya Biswas
  • Sarbajit Chaudhuri
Original Article


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.


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

JEL Classification

D58 I24 I28 J31 



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.


  1. Autor, D.H. 2014. Skills, education, and the rise of earnings inequality among the “other 99 percent”. Science 344 (6186): 843–851.CrossRefGoogle Scholar
  2. Becker, G.S. 1964. Human capital. Chicago: University of Chicago Press.Google Scholar
  3. Beyer, H., P. Rojas, and R. Vergara. 1999. Trade liberalization and wage inequality. Journal of Development Economics 59 (1): 103–123.CrossRefGoogle Scholar
  4. Brown, P., A. Green, and H. Lauder. 2001. High skills: globalization, competitiveness, and skill formation. Oxford: Oxford University Press.CrossRefGoogle Scholar
  5. Chaudhuri, S. 2014. ‘Does public assistance for skills formation necessarily improve wage inequality in the future?’, MPRA working paper no. 57788.
  6. Chaudhuri, S., and U. Mukhopadhyay. 2014. FDI in developing countries: a theoretical evaluation. New Delhi: Springer.Google Scholar
  7. Chaudhuri, S., and U. Mukhopadhyay. 2009. Revisiting the informal sector: a general equilibrium approach. New York: Springer.Google Scholar
  8. Chusseau, N., and M. Dumont. 2012. Growing income inequalities in advanced countries. Working paper no. 260, Society for the Study of Economic Inequality.Google Scholar
  9. Crouch, C., D. Finegold, and M. Sako. 1999. Are skills the answer: the political economy of skill creation in advanced industrial countries. Oxford: Oxford University Press.CrossRefGoogle Scholar
  10. Currie, J., and A. Harrison. 1997. Trade reform and labour market adjustment in Morocco. Journal of Labour Economics 15: S44–S71.Google Scholar
  11. Feenstra, R.C., and G.H. Hanson. 1997. Foreign direct investment and relative wages: evidence from Mexico’s maquiladoras. Journal of International Economics 42: 371–394.CrossRefGoogle Scholar
  12. Harrison, A., and G. Hanson. 1999. Who gains from trade reform? Some remaining puzzles. Journal of Development Economics 59 (1): 125–154.CrossRefGoogle Scholar
  13. Heckman, J., and A. Krueger. 2003. Inequality in America: What role for human capital policies?. Cambridge, MA: MIT Press.Google Scholar
  14. Khan, A.R. 1998. The impact of globalization in South Asia. In Globalization, growth and marginalization, ed. A.S. Bhalla. London: Macmillan.Google Scholar
  15. Robbins, D. 1995. Trade, trade liberalization and inequality in Latin America and East Asia: Synthesis of seven country studies. HIID.Google Scholar
  16. Vanhuysse, P. 2007. The new political economy of skill formation. Public Administration Review 67: 1–14.Google Scholar
  17. Wood, A. 1997. Openness and wage inequality in developing countries: the Latin American challenge to East Asian conventional wisdom. World Bank Research Observer, January.Google Scholar
  18. World Bank. 2014. World development indicators of the world development report(s). Washington, DC.Google Scholar
  19. World Bank Data on Government Expenditure. 2017.

Copyright information

© The Indian Econometric Society 2017

Authors and Affiliations

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

Personalised recommendations