Can public subsidy on education reduce wage inequality in the presence of automation?

Abstract

We examine the impacts of a public education subsidy on the wage differential in the presence of automation by establishing general equilibrium models with two-stage skill formation. We show that for an economy with full employment, a public education subsidy will increase the wage differential in the first stage of skill formation, but in the second stage, the wage differential may be reduced if the ratio of unskilled labor to skilled labor is large enough. For an economy with unemployment, a public education subsidy will narrow down the wage differential in the first stage, but in the second stage, the wage differential may be widened if that ratio is large enough.