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economic growth.
The theory of human capital investment relates inequality in
earnings to differences in various factors ranging from talents,
family background and bequests and other assets. Children from
low income family would be unable to invest the optimal amount
into their education due to the limited resources, whereas
children from high income family would be able to invest the
optimal amount into their education. The human capital theory
suggests that with the greater investment in education, the
individuals accumulate knowledge and skills that enhance their
potential income earnings. As such, individuals from low income
family with lower investment in education are more likely to end
up with jobs that pay lower compared to individuals from high
income family with higher investment in education, thereby
worsening the income inequality situation.
Schultz and others early on emphasized that investments in
human capital were a major contributor to economic growth. In a
research paper published by Amparo and Rafael, their findings
indicate that education inequality is associated with lower investment rates and,
consequently, lower economic growth. Countries that in 1960 showed greater
inequality in the distribution of education have experienced lower investment rates
than countries which showed less inequality. These lower investment rates have in
turn meant lower economic growth rates. Results from a research by Nil Demet
provide confirmation of a nonlinear relationship between economic growth and
education inequality. Economic growth is negatively related to education
inequality at low levels of the education Gini coefficient, indicating that a more
even distribution of education attainment leads to higher growth rates for provinces
with more even education distributions. For provinces with relatively high levels of
education inequality, on the other hand, a positive association exists between
growth and education inequality. This could suggest some threshold level of
education inequality beyond which improvements in the distribution of education
will lead to higher growth rates.
Theory predicts that education inequality has a negative effect on growth through
two separate channels; one through the inefficient allocation of resources, the other
through its effect on the rate of human capital accumulation. After all, for countries
where the majority of its people are from low income family and are in low-skilled
industries due to the low investment in education, the contribution to economic
growth from these sectors would be low compared to countries with highly skilled
labor force due to the nature of the industry. That explains why as countries