How to close the skill gap? Parental Background and Children's Skill Development in Indonesia
Differences in children’s skills manifest early in life, and understanding how these translate through childhood into adult skills is crucial for designing suitable policies to close the skill gap and decrease inequality. In this paper, I build a dynamic structural model for parents’ investment decisions on nutrition and schooling estimating children’s skill production functions. I find that a) nutrition and schooling are complements, and b) parental productivity differences in education and household income are the main contributors to the adult skill gap in Indonesia. Income differences lead to lower investments in children from poorer backgrounds. These differences magnify by parents with lower education being less productive in turning investments and current skills into future skills, which leads to an adult skill gap of 0.35 standard deviations. I perform simulations to analyze the joint effects of cash transfers and nutrition price subsidies.
This research has been financed by the European Research Council (ERC) through Starting Grant no. 804989.