The dynamics of income inequality in a growth model with human capital and occupational choice

We model a successive-generation economy in which parents, motivated by family altruism, decide to finance or not their offspring's human capital accumulation on the basis of their altruistic motive, their own income and the equilibrium ratio between skilled labor and unskilled labor wages. The question we ask is how the growth process shapes the wage inequality and the split of the population in two classes. We study the transitional dynamics of human capital accumulation and of income inequality. First, we prove the existence of equilibrium paths. Then we show that there exists a continuum of steady-state equilibria. We prove the convergence of each equilibrium path to one of the steady-state equilibrium and describe the evolution of income inequality between skilled and unskilled workers and income in-equality among the skilled workers. The former inequality is persistent in the long run while the latter is not. We also look at the relationship between inequality and output on the set of steady states and find that this relations hip is ambiguous. Finally, we develop an endogenous-growth version of the model. In this version of the model the relationship between inequality and the rate of growth is also ambiguous.