Cheap home goods and persistent inequality.

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Academic Journal

Economic Theory; Dec2010, Vol. 45 Issue 3, p417-451, 35p, 2 Diagrams, 1 Chart, 1 Graph

There exists a large literature which shows that public education is favorable for growth because it increases the level of human capital and at the same time it tends to produce a more even income distribution. More egalitarian societies are also associated with less social conflicts, and individuals have a lower tendency to report themselves happy when inequality is high. Therefore, it is important to study the reasons why the elite opposes the development of a strong public education system. It might be that education is related to social status and a strong public education system might threaten the elite's political power. We show that one aspect of social status is the specialization of skilled workers in high-paid jobs and the abundance of unskilled workers in the production of cheap 'home goods' in the market, such as painting and cleaning a house, babysitting, and/or cooking. We emphasize the role of general equilibrium price adjustments to show that depending on the level of inequality, the elite might prefer an economy with a positive and 'high' cost of education than an economy where skills are freely provided. We show that this result goes through even if the skilled wage is not directly affected by the ratio of skilled to unskilled workers. We also provide empirical evidence consistent with our theory. [ABSTRACT FROM AUTHOR]