The U-Shape of Income Inequality over the 20th Century: The Role of Education

Abstract

We propose an overlapping generations model with three social classes to investigate the effects of higher education on the evolution of inequality. Initially, no social class invests in higher education, and inequality is driven by wealth accumulation/bequests. Once the rich surpass a certain income threshold, they invest in higher education and their children's incomes start to grow faster. Over time, the middle class and, potentially, the poor follow suit. Overall, this framework provides a candidate explanation for (i) the U-shaped evolution of income inequality, (ii) the fall and rise of inheritance flows, and (iii) differential investments in higher education. © We propose an overlapping generations model with three social classes to investigate the effects of higher education on the evolution of inequality. Initially, no social class invests in higher education, and inequality is driven by wealth accumulation/bequests. Once the rich surpass a certain income threshold, they invest in higher education and their children's incomes start to grow faster. Over time, the middle class and, potentially, the poor follow suit. Overall, this framework provides a candidate explanation for (i) the U-shaped evolution of income inequality, (ii) the fall and rise of inheritance flows, and (iii) differential investments in higher education. © The editors of The Scandinavian Journal of Economics 2020