Technical Report Human Capital Investment, Credentialing, and Wage Differentials

Tanaka, Masashi

13-31-pp.1 - 28 , 2017-08 , Graduate School of Economics and Osaka School of International Public Policy (OSIPP) Osaka University
* Revised: Human capital investment, Signaling, and Wage differentials[13-31, 2013]
This study considers how individuals determine the ratio of two kinds of educational investment. One kind contributes to labor skills and the other does not. We refer to the former as human capital investment and the latter as unproductive investment which improves test scores, but has no beneficial effect on students’ human capital. We formulate an overlapping generations economy in which the rich and poor invest in both types of education. We argue that the ratio of human capital investment to unproductive investment is a U-shaped function of the wage differentials between the rich and poor. Moreover, we identify three patterns of stable steady states for these wage differentials, namely, no-inequality, high-inequality, and multiple steady states. Using these results, we conclude that a rapid increase in the level of skill-biased technology may switch the steady state from no inequality to high inequality. Further, it causes a temporary or permanent increase in the ratio of unproductive investment during the transition to the new steady state.

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