Per capita income, human capital, and inequality convergence: A latent-variable approach

Journal of Agricultural and Applied Economics, 2003 by Deepak, Sri Devi, Seale, James L Jr, Moss, Charles B

In terms of size, the openness inequality is the largest throughout the period followed by the inequality in government expenditure and investment expenditure in that order. Income inequality in 1955 was smaller to that of international openness, government expenditure, and investment, but larger than that of human capital. From 1960 until 1975, income and investment inequalities were approximately the same size, but after 1975 that of investment increased while that of income stayed essentially level. Although it increased slightly over the time period, human-capital inequality was much smaller than that of the others. This indicates that, though human capital in the 22 countries became slightly more dissimilar over the entire period, these countries are still more similar in terms of human capital than in terms of the other variables.

These results support the fact that convergence in income is contributed to by all of its determinants. Thus, a low rate of convergence in income after 1980 could be due to a rapid rate of convergence in openness, a high rate of divergence in investment, a modest rate of convergence in government expenditure, and a slow rate of divergence in human capital (which influenced income more positively than the other determinants).

Conclusions and Discussion

This study estimates a latent-variable formulation depicting the effect of human capital on per capita income for 22 OECD countries from 1955 to 1990. The model indicates that human-capital formation has a positive effect on per capita income, as does international openness, government expenditure, and investment expenditure. These results correspond to the contemporary evidence presented by Barro; Mankiw, Romer, and Weil; Tallman and Wang; Lucas (1988, 1993); and Romer (1990) who conclude that human-capital accumulation is vital to the growth of an economy. In addition, the results also indicate that international openness has a positive effect on per capita income and may explain the continued expansion in per capita income after investment in human capital slowed in the 1970s.

The inequality measures indicate that income inequality certainly converged over the entire period but leveled off after 1980. The inequality measures of investment, government expenditure, and especially international openness declined until 1975 and surely contributed to the rapid income convergence. After 1975, investment inequality and human-capital inequalities grew larger. These results suggest that income convergence is not automatic for these countries but that these countries must continue to become more similar in terms of investment, government expenditure, openness, and human capital if they are to continue to converge in terms of real per capita income levels.

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