Q5) Please discuss the relationship between human capital, inequality, and

economic growth.
The theory of human capital investment relates inequality in
earnings to differences in various factors ranging from talents,
family background and bequests and other assets. Children from
low income family would be unable to invest the optimal amount
into their education due to the limited resources, whereas
children from high income family would be able to invest the
optimal amount into their education. The human capital theory
suggests that with the greater investment in education, the
individuals accumulate knowledge and skills that enhance their
potential income earnings. As such, individuals from low income
family with lower investment in education are more likely to end
up with jobs that pay lower compared to individuals from high
income family with higher investment in education, thereby
worsening the income inequality situation.
Schultz and others early on emphasized that investments in
human capital were a major contributor to economic growth. In a
research paper published by Amparo and Rafael, their findings
indicate that education inequality is associated with lower investment rates and,
consequently, lower economic growth. Countries that in 1960 showed greater
inequality in the distribution of education have experienced lower investment rates
than countries which showed less inequality. These lower investment rates have in
turn meant lower economic growth rates. Results from a research by Nil Demet
provide confirmation of a nonlinear relationship between economic growth and
education inequality. Economic growth is negatively related to education
inequality at low levels of the education Gini coefficient, indicating that a more
even distribution of education attainment leads to higher growth rates for provinces
with more even education distributions. For provinces with relatively high levels of
education inequality, on the other hand, a positive association exists between
growth and education inequality. This could suggest some threshold level of
education inequality beyond which improvements in the distribution of education
will lead to higher growth rates.
Theory predicts that education inequality has a negative effect on growth through
two separate channels; one through the inefficient allocation of resources, the other
through its effect on the rate of human capital accumulation. After all, for countries
where the majority of its people are from low income family and are in low-skilled
industries due to the low investment in education, the contribution to economic
growth from these sectors would be low compared to countries with highly skilled
labor force due to the nature of the industry. That explains why as countries

advance from developing countries to being a developed country, they typically

move from a low skilled (manual based) industry to a knowledge based economy.
Q6) Please discuss how the technological progress can affect human capital
accumulation and the wage distribution.
Based on the research from Andrea Vindigni, there is an education-technology race
in which the accumulation of human capital triggers the spread of highly efficient
but skilled biased technologies. This in turn generates potentially deep
transformations in the wage structure and in the distribution of income. In
particular, consistently with the evidence on the recent experiences of many
industrialized countries, skilled wages can increase and unskilled wages can fall,
both in absolute terms, rather than just relative ones. The pauperization suffered by
the unskilled on impact may be long lasting and substantially slow down the pace
of the diffusion of the new technologies if a market for financing human capital
investment does not exist.
Moreover, with this technological progress, there is a greater need to invest more in
education (human capital accumulation) so as to acquire the knowledge and
skillsets required for the skilled-based roles in the industries. Individuals from low
income family would be disadvantaged as they may lack the resources to invest the
optimal amount required to secure a better paying skilled job, and thus remains
trapped in low-skilled labor roles that pays a lot lower. Individuals from high
income family on the other hand are able to invest the optimal amount thereby
raising human capital accumulation, and secure highly skilled roles that commands
a higher wage as well. This disparity thus further worsens the wage distribution
and income inequality situation.