Investment in Education and Income Inequality

Income inequality has risen in many parts of the world during the past decades. Rising inequality is no longer a problem of only Latin American and Sub-Saharan African countries. Some OECD countries, and recently also East Asian countries, have experienced widening income differentials. In the 1990s the problem has also become visible in the countries of the former socialist bloc during their transition period towards market economy. Rising income inequality has led to a significant rise in the number of poor people, which makes the issue even more critical.The unfavourable developments of the income distribution can, to a large extent, be blamed on the unequal acquirement of human capital investment. This paper analyses a data set of fifty countries and recognises the influence of educational attainment on inequality. Given the differences in the distribution of physical capital, it can be observed that countries that do not provide sufficient education at the primary level, have more problems in creating an egalitarian society. Especially in developing countries this means that poverty is strongly correlated with unequal supply of education. In developed countries the recent rise in earnings differentials has been a consequence of rising returns to education. This paper examines the impact of post-primary education in general, which is probably not a sufficient indicator of the supply shortages of education. The rise in wage inequality seems to be a problem in certain technical branches and its impact could be better analysed with more specific data on secondary and tertiary education in several areas.