When 'Equal Opportunity' is not Enough: Training Costs and Intergenerational Inequality

Abstract

This paper develops an individual optimization model with persistent intergenerational immobility. Its key feature is that training costs are negatively correlated with family background, leading to differences in privately optimal training levels across population groups. Heterogeneity of innate abilities is shown to reduce but not eliminate the importance of family backgrounds. Conversely, wage thresholds which result from indivisibilities in the production or training functions or noncompetitive elements in the economy (such as segmented labor markets) increase the scope for inequality in the steady-state.