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Inequality, Human Capital Formation and the Process of Development

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  • Oded Galor

Abstract

Conventional wisdom about the relationship between income distribution and economic development has been subjected to dramatic transformations in the past century. While classical economists advanced the hypothesis that inequality is beneficial for growth, the neoclassical paradigm dismissed the classical hypothesis and suggested that income distribution has limited role in the growth process. A metamorphosis in these perspectives has taken place in the past two decades. Theory and subsequent empirical evidence have demonstrated that income distribution has a significant impact on human capital formation and the development process. In early stages of industrialization, as physical capital accumulation was a prime engine of growth, inequality enhanced the process of development by channeling resources towards individuals whose marginal propensity to save is higher. In later stages of development, however, as human capital has become a main engine of growth, equality, in the presence of credit constraints, has stimulated human capital formation and growth. Moreover, unequal distribution of land has been a hurdle for economic development. While industrialists have had an incentive to support education policies that foster human capital formation, landowners, whose interests lay in the reduction of the mobility of their labor force, have favored policies that deprived the masses of education.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17058.

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Date of creation: May 2011
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Publication status: published as “Inequality, Human Capital Formation and the Process of Development,” Handbook of the Economics of Education , North Holand, 2011
Handle: RePEc:nbr:nberwo:17058

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Cited by:
  1. Franciscos Koutentakis, 2012. "Public Education and Democracy in a Simple Model of Persistent Inequality," Working Papers 1204, University of Crete, Department of Economics.
  2. Mazzonna, Fabrizio, 2011. "The long-lasting effects of family background: A European cross-country comparison," MEA discussion paper series 11245, Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy.
  3. Bas ter Weel & Semih Akcomak & Dinand Webbink, 2013. "Why Did the Netherlands Develop so Early? The Legacy of the Brethren of the Common Life," CPB Discussion Paper 228, CPB Netherlands Bureau for Economic Policy Analysis.
  4. Marika Karanassou & Hector Sala, 2012. "Inequality and Employment Sensitivities to the Falling Labour Share," The Economic and Social Review, Economic and Social Studies, vol. 43(3), pages 343-376.
  5. Cinnirella, Francesco & Hornung, Erik, 2013. "Landownership Concentration and the Expansion of Education," CEPR Discussion Papers 9730, C.E.P.R. Discussion Papers.
  6. Russo, Alberto, 2012. "From the Neoliberal crisis to a new path of development," MPRA Paper 38004, University Library of Munich, Germany.
  7. Matsuo, Miki & Tomoda, Yasunobu, 2012. "Human capital Kuznets curve with subsistence consumption level," Economics Letters, Elsevier, vol. 116(3), pages 392-395.
  8. Russo, Alberto, 2011. "Towards a stochastic model with heterogeneous agents and class division," MPRA Paper 31733, University Library of Munich, Germany.
  9. Jun, Bogang, 2012. "Non-Financial Hurdles for Human Capital Accumulation: Landownership in Korea under Japanese Rule," MPRA Paper 43172, University Library of Munich, Germany.
  10. Jun, Bogang & Hwang, Won-Sik, 2012. "Financial Hurdles for Human Capital Accumulation: Revisiting the Galor-Zeira Model," MPRA Paper 46317, University Library of Munich, Germany.
  11. Baten, Joerg & Juif, Dácil, 2014. "A story of large landowners and math skills: Inequality and human capital formation in long-run development, 1820–2000," Journal of Comparative Economics, Elsevier, vol. 42(2), pages 375-401.

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