Wage Disparity and Human Capital Accumulation

The cost of education is a deterrent to investment in skills but this can be overcome if there is a strong complementarity between skills and technology. This chapter explores the consequences of the view that increase in human capital enables more technological change because more skilled workers enable the introduction of more sophisticated and productive machines. The technological change in turn influences the demand for skilled workers and affects the return on the acquisition of human capital. With technological change and the acquisition of skills having mutually reinforcing effects that enhance the returns to skilled labour and to investments in technology, the gap between skilled and unskilled workers can increase which results in disparities that have political and social consequences. We show that some counterintuitive outcomes are possible. In an economy with a poor endowment of skilled labour for instance and where unskilled workers are relatively productive in the production of goods and services, a feeble technology-driven demand for skilled labour raises the return to skilled labour relative to unskilled labour and simultaneously causes a substitution for skilled with unskilled labour that is abundantly available. Similarly, an increase in the cost of education paradoxically can raise the investment in education due to the complementarity between investment in education and technological change which causes wage disparity to rise along with the stock of skilled labour in the economy. The cost of education then is not a deterrent to investment in education if the skills produced can trigger off changes in technology that raises the return to education strongly enough so as to pay for the cost. The quality of skills imparted in education is the key to development.