Inequality, Human Capital and Growth

All - Sep 06 2018



Economists are increasingly focusing on the links between inequality and economic growth. This growing literature, though sometimes contradictory, has highlighted a material relationship. Yet, few authors have thoroughly analysed the intermediaries of this interaction. One of the key determinants usually put forth is human capital. This seems only natural as the role of human capital for growth is now well established.

 

Our work builds on this literature to provide a more comprehensive analysis of the link between inequality, human capital, and growth. To avoid the common variable selection pitfall, we rely on well-established statistical analysis methods and a large dataset to conduct our study. We then construct aggregated inequality and education indices to highlight the links between inequality, human capital, and growth.

We find that income inequality is highly negatively correlated with the level of human capital – as measured by this educational composite index – even once a country’s level of economic development is taken into account. With this framework, we also find the level of human capital to be a good predictor of a nation’s long-term growth. This suggests that economic inequality could deteriorate growth prospects by undermining the quality of education reached and hence the accumulation of human capital.

Surprisingly, intergenerational immobility does not seem to explain how income inequality translates into a lower level of human capital, as we find a weak correlation between a high level of economic inequality and intergenerational immobility. However, both factors seem to negatively affect human capital accumulation.


 

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