On the Persistence of Inequality in the Distribution of Abilities and Income

Abstract

Abstract In this paper we discuss the im pact of malnutrition on the distribution of abilities and income in a simple overlapping generations framework. Workers are distributed uniformly over a low-ability and a high-ability range. If workers earn below subsistence wages, the prob ability that their children will have low abilities is higher than with above subsistence wages due to the malnutrition resulting from below subsistence level incomes. Using a nested Ethier production function, we find that in this economy aggregate productivity output is a humpshaped function of the share of low-ability w orkers. A s the model generates multiple equilibria with respect to the share of low-ability workers, the economy can get trapped in a low productivity distribution of abilities within the population, giving rise to new generations with relatively low abilities resulting from malnutrition. A consumption subsidy financed by a wage tax on the parent generation to the offspring of low-ability workers will increase the likelihood that their offspring will be in the high-ability range, thus permanently increasing output for all future generations. Using a numerical example, we show that this type of redistributive policy is welfare improving as the parent generation alive during the initiation of the policy can be reimbursed for its utility loss arising from the wage tax if the intrinsic productivity difference between people with relatively low abilities and people with relatively high abilities is sufficiently large