Improvements in basic education, particular literacy rates, have led to higher average incomes around the world, but they have not reduced inequality between the highest and lowest earners. That is the central finding of research by Amparo Castelló-Climent and Rafael Doménech, to be presented at the Royal Economic Society''s 2014 annual conference.
According to their study, there have been large improvements in education and skills around the globe, which have led to higher incomes. But a more equal distribution of education has not translated into a more equal distribution of income: all groups have increased their income by the same proportion and, therefore, maintain their income shares, meaning that inequality has remained unchanged. In most parts of the world, the inequality level in 2006 was very similar to that in 1960.
The researchers find that globalisation or skill-biased technological progress have increased income at the top of the education distribution, compensating for the income effects of better education at the bottom. For example, skill-biased technological change increased the wage gap between skilled and unskilled workers by 23% between 2000 and 2011.
The authors comment:
''Our results do not imply that educational policies have not reduced poverty or improved wages and the standards of living of hundreds of millions with better education.
''On the contrary, better education is crucial to increasing average earnings per worker, and the eradication of illiteracy is a necessary condition to ensure access to higher levels of education for all people.''
In recent decades, most developing countries have made a great effort to eradicate illiteracy among several hundreds of millions of people. As a result, the inequality in the distribution of education has been reduced by more than half.
But in spite of the equalising process in the distribution of education, inequality in the distribution of income has hardly changed. This fact is not restricted to developing countries alone: similar patterns are found in high-income OECD economies.
This study shows that increasing returns to education, globalisation and skill-biased technological change can explain why the fall in human capital inequality has not been sufficient to reduce also income inequality.
To analyse the evidence on education and income inequality, the authors have updated their previous dataset on human capital inequality indicators using the improved educational variables of Barro and Lee (2013).
As Figure 1 shows, there has been a significant reduction in education inequality around the world from 1950 to 2010. In most countries, this large reduction has mainly been due to a sizeable decline in the share of illiterates.
But as Figure 2 shows, a more equal distribution of education has not translated into a more equal distribution of income: in most regions, the income Gini coefficient in 1960 is very similar to that of 2005.
Why have the reductions in education inequality not resulted in similar reductions in income inequality? The authors test several hypotheses that may explain this puzzle and find empirical support for them.
First, they find that, at the aggregate level, the returns to education have increased with the level of schooling – that is, the increment in income per worker for an additional year of schooling is lower in primary education (0.02%) than in secondary (0.07%) and tertiary education (0.22%).
Thus, in terms of the distribution of income, the smaller effects of large improvements in education at the bottom end of the distribution (mainly due to the fall in the illiteracy share) have been partially compensated for by the greater effects of smaller improvements in education at the top.
Second, exogenous forces such as globalisation or skill-biased technological progress have increased income at the top of the education distribution, compensating for the income effects of better education at the bottom. In the end, all groups increase their income by the same proportion and, therefore, maintain their income shares.
Thus, for a broad sample of countries, the researchers show that increases in the supply of skills and reductions in education inequality would have reduced income inequality if their effects had not been offset by the increase in the demand of skilled workers and the effects of globalisation. The results show that skill-biased technological change has increased the wage gap between skilled and unskilled workers by 23% between 2000 and 2011.
All these results are highly relevant for development policies. Many governments have made great efforts to reduce illiteracy rates, but these policies have not been accompanied by a more even distribution of income because other forces have offset the effects of a smaller education inequality.
The results of this research do not imply that educational policies have not reduced poverty or improved wages and the standards of living of hundreds of millions with better education. On the contrary, better education is crucial for increasing average earnings per worker, and the eradication of illiteracy is a necessary condition to ensure access to higher levels of education for all people.
Furthermore, better education is also the best policy to deal with the effects of skill-biased technological change and globalisation.
''Human Capital and Income Inequality: Some Facts and Some Puzzles'' by Amparo Castelló-Climent and Rafael Doménech