The effect of income inequality on human capital inequality: Evidence from China

This paper studies the effect of income inequality on human capital inequality empirically across 31 provinces, municipalities, and autonomous regions of China during 1996-2018. Using a series of econometric approaches, including the two-way fixed-effect IV panel regression, we find that: (i) growing income inequality is associated with an expansion in human capital inequality, given all other things being equal, and (ii) increasing the growth rate of initial income, as an essential family resource to finance access to schooling, tends to weaken the positive effect of income inequality on human capital inequality. Our results are consistent with the existing theory, showing that impoverished households who have less family resources are more likely to be restrained from accessing better education opportunities under credit market imperfections. Moreover, our results are robust to alternative modeling specifications and estimation methods, including instrumental variables that address the problem of reverse causality arising from human capital inequality.