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1、 Lecture 4 Income Inequality, Human Capital and Economic Growth ECON 20332: Development Economics II B ECON 60282: Economic Analysis for Developing Countries Dr. Alessia Isopi 1 The importance of Inequality Inequality matters in its own right; Inequality matters for growth; Inequality matters for po
2、verty; Inequality is often a significant factor behind crime, social unrest and violent conflicts. 2 Defining Inequality Variations in living standards across a whole population; Inequality of what? - outcomes; - opportunities; - multidimensionality. 3 4 The Lorenz curve - Perfect equality of income
3、 along the diagonal line; - Income inequality if the Lorenz curve (B) is below the diagonal (A); - Equality achieved via re-distribution of amount = distance between the Lorenz curve and the diagonal. - Gini coefficient: measures this distance i.e. the higher the value, the more unequal the distribu
4、tion of income. Measuring Inequality The Gini coefficient An aggregate measure of inequality; Relation to the Lorenz curve: Gini Coefficient= A/(A+B); It varies between zero (0) and one (1). 5 Differences among countries 6 Why do countries differ in their levels of income? Why is there income inequa
5、lity at all? People differ in many ways relevant to their incomes: in human capital (education and health); in where they live (city vs. countryside); in their ownership of physical capital; in the particular skills they have; in their luck. Differences translated into differences in income by the e
6、conomic environment. 7 Figure 2: Differences between countries or changes over time have their source in either the return to education or the distribution of education. We want to look at three critical issues in this literature: (i) Does increasing the supply of education improve education attainm
7、ent? (ii) Does increasing the supply of education lead to improvements in labour market outcomes? (iii) Can investments in health affect education attainment? Three Questions 8 Problems regarding (i) and (ii) ability, liquidity constraints or parental characteristics may be driving the results. Diff
8、i cult to fi nd exogenous sources of variation in education, i.e., standard problem in policy analysis. Diffi cult to isolate the impact of an expansion of education ideally want randomised trial which are very diffi cult to carry out in the real world. Three Questions 9 Experiments: Treatment vs Co
9、ntrol. Only way of getting truly exogenous policy variation; Big area of work now, e.g., textbooks, devolution of school funding (also previous lecture example); Typically there is a researcher-NGO partnerships, e.g., MIT Poverty Action Lab. Investigating the Human Capital effect 10 y + i = + Ti + t
10、i + (Ti ti ) + t i = 1, ., N individuals Ti Ti = 0, 1 denotes control and treatment group respectively; ti ti = 0, 1 denotes pre-treatment and post-treatment group respectively; is a constant term; is the treatment group specifi c effect (to account for average permanent differences between treatmen
11、t and control); a time trend common to control and treatment groups; the true effect of treatment. Random Experiment 11 Intervention Design 1973-78: Indonesian government constructed over 61,000 primary schools Use the policy experiment to examine impact on education Estimates of exogenous returns t
12、o education using this exogenous variation in schooling (assuming that the program had no other effect than to increase the quantity of education) range from 6.4% to 9.1%. Duflo (AER, 2001): Results 13 Income Distribution and Economic Growth Galor and Zeira (1993) examine the linkages between income
13、 distribution and economic growth by exploring the human capital investment channel. 2 sectors: one employs skilled labour and capital; the other employs unskilled labour only. Skilled sector s production function: = (, ) The unskilled sector s production function: = 14 Skilled and Unskilled Sector
14、Skilled Sector Unskilled Sector A worker needs to make an indivisible investment of h to acquire the human capital required to work in the skilled sector. Complementarity between skilled labour and capital but no complementarity between unskilled labour and capital. 15 Labor in sectors Output Return
15、 to labor Return to capital = (,) = (,) = (,) = Consumption and Bequests Individuals live for 2 periods where: 1. they can either work as unskilled labour in both periods or 2. invest in human capital in the period t=1 and work as skilled labour in the period t=2. Unskilled: If they work as unskilled labour, they earn in both periods. Skilled: If they invest h into human capital in period t=1, they can earn in the period t=2. 16 Consumption and Bequests Each individual has one parent and one child creating the connection between generations within dynasties and implying that there
