Human Capital Formation, Education and Earnings Inequality

This paper presents a simple model of human capital formation that illustrates how the structure of the education system mediates the effects of shocks on the earnings distribution. This might help understand the differences in changes of inequality in OECD countries despite the similarity of shocks and technological changes affecting these countries. The model emphasizes heterogeneity of individuals and multi-dimensionality of human capital. The reactions in individual behavior triggered by technological change are crucially affected by the education system and are able to rationalize the divergent developments in inequality.