Captial-Skill Complementarity and Optimal Education Policy

This paper analyses the general equilibrium implications on public education policies in an economy with heterogeneous agents, human capital investment and capital-skill complementarity. Human capital is accumulated through private and public education inputs. Workers choose between being goods workers or human capital workers and are taxed to support public education. The government hires human capital workers to maximize education quality given tax revenue. Due to collective bargaining in the human capital market, the government has a tradeo¤ between the quantity and quality of human capital it can a¤ord. We show that income inequality increases even when education quality increases and that as income inequality increases, it is optimal for the government to increase the number of human capital workers but with lower within chort human capital levels.