Unequal wages for equal utilities

When educational policy is supplemented by a redistributive income tax,
and when individuals differ in their ability to benefit from education, the optimal policy
is typically rather regressive. Resources are concentrated on the most able individuals
in order to get a “cake” as big as possible to share among individuals through
income taxation. In this paper, we put forward another reason to push for regressive
education. It is not linked to heterogeneity in innate ability but to the property that
welfare may be a convex function of an individual’s wage. For simplicity, we assume
a linear education technology and a given education budget. To give the equal wage
outcome the best chance to emerge, we also assume that individuals have identical
learning abilities. Nevertheless, it turns out that in the first-best wage inequality is
always preferable to wage equality. Even more surprisingly, this conclusion remains
valid in the second-best when the feasible degree of wage differentiation is sufficiently
large. This is in spite of the fact that wage equalization would eliminate any
need for distortionary income taxation.