Skill formation, environmental pollution, and wage inequality

This paper studies the effects of government-led skill formation on environmental quality and the skilled–unskilled wage gap through the three-sector general equilibrium approach. The process of skill formation is divided into two periods. In the basic model, an increase in the subsidy on skill formation can improve the environment in both periods, but may widen or narrow down the wage gap, depending on the relative capital intensities of the urban sectors, and on the environmental dependence of the rural sector. In the presence of urban unemployment, the main results of the basic model still more or less hold. This paper suggests that, although the subsidy on skill formation does not necessarily reduce wage inequality, it does serve as an effective policy to improve environmental quality.