Income Inequality and Intergenerational Mobility in an Endogenously Growing Economy

Incorporating skill-biased technological changes and education (skill-acquisition) costs into a simple intergenerational mobility model, this chapter analyzes the dynamics of income inequality and intergenerational mobility, and the effects of technological progress on inequality in an endogenously growing economy. The education cost plays a crucial role in the model. If it does not increase sharply with technological progress, the economy monotonically converges toward the steady state. In this case, the skill-premium puzzle can be explained if human capital greatly contributes technological progress. In contrast, when the cost increases rapidly with technological progress, then aggregate growth, mobility and inequality exhibit cyclical behavior. In addition, a possibility is pointed out that if human capital greatly influences technological progress, then a one-time increase in exogenous technological progress decreases aggregate growth not only in the transition but also at the steady state.