WHEN EDUCATION SPURS ECONOMIC GROWTH, INCOME EQUALITY AND MOBILITY INCREASE
Economic growth that is based on the accumulation of human capital through education will be accompanied by increased income equality and increased intergenerational income mobility. That is the conclusion of new research by Professors Yishay Maoz and Omer Moav published in the latest issue of the Economic Journal. Their results help define the western economies’ growth in the twentieth century, where equality rose until the 1970s as growth sprang from the increase in secondary school and university places. Since the 1970s, inequality has tended to increase as growth has been driven more by physical capital accumulation and technological progress.

The researchers’ primary focus is on intergenerational income mobility - the difference between an offspring’s place in the economy’s income ranking and their parent’s place in the ranking when the parent was the offspring’s age - and its role in the relationship between human capital accumulation and economic growth. Empirical evidence indicates that mobility is positively correlated with the degree of equality in the economy’s income distribution, and that mobility and equality are higher in developed economies than in developing ones. This research explains the three-way interconnectedness of mobility, equality and growth.

Nobel laureate Gary Becker originally explained the relationship between mobility and equality. In his analysis, educated workers earn more than uneducated workers and therefore upward mobility occurs as the offspring of an uneducated worker acquires education.

Maoz and Moav extend this approach by placing the relationship in the context of economic growth and focusing on individuals’ decisions to increase their levels of education. In their analysis, production requires a combination of educated and uneducated labour, where educated people earn more than uneducated people. Thus, mobility from the uneducated sector to the educated one increases the wages of the previously uneducated individuals and, as a consequence, the equality of the income distribution. As mobility occurs, the number of educated individuals in the economy increases and the economy grows.

This growth is derived from two sources. First, increases in the stock of human capital increases the economy’s productivity. Second, increases in mobility mean that there is a better correlation between an individual’s ability and the amount of education that they undertake. This improved correlation increases the overall returns obtained from education, as it is a more efficient allocation of resources. In other words, the resource of education is now flowing to where the returns are highest.

The researchers use their analysis to explore the impact of public policies such as subsidies to education and redistributive taxation. While conventional wisdom suggests that taxation depresses growth since it lowers investment incentives, recent empirical work shows that taxation can have a positive effect on growth. This research explains how: although taxation reduces the wages of the educated workers and hence reduces incentives to purchase education, it also loosens the financial constraints on the poor and thus enables more people to acquire education. Such a relaxation of constraints can outweigh the decrease in the incentive to invest, especially in developing economies where there are relatively large numbers of poor uneducated people.

Note for Editors: ‘Intergenerational Mobility and the Process of Development’ by Yishay Maoz and Omer Moav is published in the October 1999 issue of the Economic Journal. Maoz is at the Hebrew University of Jerusalem; Moav at MIT.

For Further information: contact RES Media Consultant Romesh Vaitilingam on 0117-983-9770 or 0468-661095 (email: romesh@compuserve.com); RES Media Assistant Niall Flynn on 0171-878-2919 (email: nflynn@cepr.org); Yishay Maoz on 00-972-2-588-3252 (email: msmaoz@mscc.huji.ac.il); or Omer Moav on 00-1-617-253-8547 (email: omerm@mit.edu).