Human Capital, Inequality and Growth

Income inequality is increasing in most countries at the same time as traditional redistribution policies are under pressure, not least due to strained public finances. What are the underlying causes, and what is the scope to turn the trend? This is discussed from the perspective of the link between inequality and growth running via education and human capital formation. It is argued that imperfections arising from both capital market imperfections and social barriers imply that inequality may be a barrier to education, which in turn makes inequality persistent and reduces growth. In discussing redistribution it is thus important to distinguish between the traditional passive means of redistribution via taxes and transfers to repair on the distribution of market incomes, and active means which affect the distribution of market incomes. The latter may both lead to more income equality and efficiency improvements reflected in higher incomes or income growth. Policy options to improve educational outcomes and their distribution are discussed.