The Effects of Income Inequality on Education Policy and Economic Growth Katsuyuki Naito, Keigo Nishida
Graduate School of Economics, Kyoto University, Kyoto, Japan Email: email@example.com, firstname.lastname@example.org Received November 30, 2011; revised December 20, 2011; accepted December 28, 2011
This paper presents a simple model to investigate the relationship among initial income inequality, education and economic growth. Public expenditure on education is determined through majority voting. Although preferences of individuals are not single-peaked, the individual with the median income becomes the decisive voter. Our model predicts that high initial inequality has a negative impact on education expenditure and therefore retards economic growth. Keywords: Income Inequality; Majority Voting; Human Capital Accumulation; Economic Growth
The relationship between initial levels of income inequality and economic growth is a central question in growth and development literature. Many political economists have addressed this question by analyzing how income inequality affects the size of redistribution. Standard politico-economic theories predict that, under majority voting, high income inequality is associated with a large scale of redistribution policies as the poor majority favors it. Persson and Tabellini  argue that income redistribution creates adverse incentive for investments and therefore high income inequality is harmful for growth. However, redistribution policies may promote economic growth if they are practiced through the provision of public goods that can enhance future productivity. SaintPaul and Verdier  construct a model in which public education is the channel of redistribution. In their model, high income inequality implies strong support for public education, which facilitates human capital accumulation and economic growth. In contrast to these theories, the hypothesis that high inequality is associated with redistribution is not supported by data. For example, crosscountry regressions by Easterly [3,4] show that higher inequality leads to lower levels of public goods, education, per capita income and growth rates. This suggests the necessity for further investigations on how income inequality affects public policies and growth. This paper proposes a simple model to reconcile the theory and evidence, and analyzes the relationship among income inequality, human capital accumulation 1
and economic growth in a politico-economic framework. In the model, the heterogeneity of human capital across individuals is the only source of income inequality. We focus on two features of education. The first one is a fixed cost of education. We consider a situation in which individuals must pay tuition fees to have access to education services although they are provided by the government. This aspect of education is particularly relevant to post-compulsory education, such as high school and university education. The second feature is that the return from education is positively correlated with the level of human capital inherited from parents.1 These two features play a key role in the determination of the size of education services under majority voting. The main result of this paper is that high initial levels of inequality cause less publicly provided education services, or lower tax rates. In our model, the individual with median income is the decisive voter although preferences for tax rates are not single-peaked. When inequality is high and the income of the median voter is low, he or she does not prefer a high tax rate to enhance education. This is because the median voter cannot cover the fixed cost of education or the private return from education is too low due to his or her low level of inherited human capital. High...