Inequality in America: what role for human capital policies?

Abstract

Academics have a bias toward believing that cognitive skills are of fundamental importance to success in life (pg.171)This book presents two extended papers presented at the third Alvin Hansen Symposium on Public Policy, held in Harvard in 2002, followed by a an interesting discussion by five leading labour economists, and a rejoinder from the authors.As the title anticipates, the two contributions focus on how public policies can counteract the increasing earning inequality recorded by the US economy in the last two decades.However they endorse different perspectives.In his contribution on "Inequality, too much of a good thing", Alan Krueger documents the increased income dispersion at both ends of the distribution in US, and then reviews potential arguments against income inequality.Leaving aside altruistic beliefs induced by philosophy or religion, Krueger pays more attention to what he terms "enlightened self-interest", whose main tenets consist of the following statements: i) more education reduces the inclination toward crimes, and therefore is cost effective in terms of reduction of future cost of protection and/or welfare provision; ii) more education increases growth through externalities in the innovation diffusion; iii) more education has an intrinsic democratising content, since it allows better informed participation and reduces the lobbying ability of the riches.Once one accepts the principle that more education is desirable, (s)he wonders how it is possible to raise the demand for education in the population.Given the existing evidence in support of the presence of liquidity constraints (even if Krueger is rather agnostic with respect to them, since it is sufficient to notice that "Children from poor families behave as if they have higher discount rates", p.21), public resources invested in education and targeted to poor families may lead to significant increase in earnings for the lower tail of incomes distribution.