Early Childhood Development, Earnings Inequality and Social Mobility in an Education Signaling Model

Abstract

The growing income inequality has been a big concern for economists and policy makers around the world. Many factors are responsible for the observed burgeoning income inequality, such as capital outflow, relocation of jobs, declining labor union, i.e., declining bargaining power of the labor, poor regulation of financial institutions, corruption, and all-encompassing globalization. Incomes of the bottom 99 percent population in a society comes mainly from earnings, and much of the earnings inequality results from the inequality of skill formation. The children of poor socioeconomic status stays behind skill accusations as compared to their rich counterpart. In modern technology-rich economies, providing high quality education to the talented individuals and matching their jobs with the highly productive technical sector is crucial for economic growth, earnings inequality and social mobility. Because education is used as a signal for a worker’s unobserved endowment of talents, its acquisition by various social groups distorts productive efficiency, lowers social mobility and increases earnings inequality. This paper provides a signaling equilibrium framework to study these issues.