Three essays on inequality

This dissertation analyzes inequality focusing on labor market frictions that determine occupational choice and on different educational policies that determine the level of education and human capital accumulation. The first essay presents an overlapping generations model with three different occupational choices: full-time manager, self-employed or worker, and frictions in the labor market due to labor protection policies. The model shows that labor market frictions can explain differences in employment structures and firm sizes across countries. Developing countries have a high entrepreneur to workforce ratio but low firm size. The main idea is that by excluding less productive workers from the labor market, policies such as minimum wages create “bad” entrepreneurs, in the sense that these individuals would be better off employed as workers. The decreased supply of labor and demand for capital have competitive equilibrium effects in a Lucas "span of control model" (1978), which prevents capital accumulation with a lower number of entrepreneurs but much larger and more productive firms. The second essay analyses the quantitative effects of labor rigidities in a model with financial frictions. The model is calibrated using U.S. data and a set of experiments is performed to investigate the effects of labor policies on productivity, occupational choice and inequality. The model fits well the U.S. income inequality statistics. The analysis includes a counterfactual exercise using Brazilian labor friction parameters. The results show that both of the labor protection policies considered have a significant impact on inequality. Finally, the last essay studies the quantitative implications of different education systems and the effects of affirmative action policies on long run inequality and productivity. A large number of countries in Latin America and Asia have adopted education policies based on income and race characteristics to offset lack of opportunities and increase intergenerational mobility. In an overlapping generations model, parents choose the type of child education, public or private school, and young agents choose to become unskilled workers or attend a university and become skilled workers. If attending university, young agents choose between public or private university. Results for the Brazilian economy show that an increase in the quality of public schools has a higher impact on inequality and output per capita than policies such as the introduction of quotas for black or native students