Educational mobility: The effect on efficiency and distribution

Within a microeconomic framework, educational mobility and inequality are studied. The labour market is characterized by imperfectly substitutable skills and production occurs in monopolistically competitive industries that exhibit local non-convexities. Education allows for upward mobility. It is shown that multiple mobility equilibria exist in the stage game. In addition, for some skill levels, Pareto improvements are possible through adjustment policies. In the repeated game, a sufficient condition is derived for polarization, in which case the economy exhibits a low growth path. A higher growth path can be achieved through intertemporal redistribution. Without adjustment, inequality will increase continuously.