Human Capital, Inequality and Growth

Summary:

Income inequality is increasing in most countries at the same time as traditional redistribution policies are under pressure, not least due to strained public finances. What are the underlying causes, and what is the scope to turn the trend? This is discussed from the perspective of the link between inequality and growth running via education and human capital formation.

This paper focuses primarily on the distribution of labour income, and not on the functional distribution between labour and capital1, with a primary focus on the lower end of the income distribution, and what can be done to  improve the position for this group. The paper thus takes a labour market perspective. The trends driven by globalization and technological changes may be interpreted as affecting both the level and composition of labour demand. For given labour supply, this inevitably shows up in wages and employment, the exact division depending on labour market institutions. It follows that the consequences of these changes to labour demand can be counteracted by changes in labour supply. This is precisely the essence of the quote by Tinbergen given above. Labour supply depends on many factors among which human capital, and thus education, is crucial. This brings forth that questions of inequality and policies to reduce it are not only a question of traditional redistribution policies (passive redistribution) but also involve education and labour market policies determining the level and distribution of qualifications and skills (active redistribution). The distinction between passive vs. active distribution policies is at the centre of the following discussion.

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