The Distribution of Human Capital and Economic Growth

This paper analyzes the interaction between the distribution of human capital, technological progress, and economic growth. It argues that the composition of human capital is an important factor in the determination of the pattern of economic development. The study demonstrates that the evolutionary pattern of the human capital distribution, the income distribution, and economic growth are determined simultaneously by the interplay between a local home environment externality and a global technological externality. In early stages of development the local home environment externality is the dominating factor and hence the distribution of income becomes polarized; whereas in mature stages of development the global technological externality dominates and the distribution of income ultimately contracts. Polarization, in early stages of development may be a necessary ingredient for future economic growth. An economy that prematurely implements a policy designed to enhance equality may be trapped at a low stage of development. An underdeveloped economy, which values equality as well as prosperity, may confront a trade-off between equality in the short-run followed by equality and stagnation in the long-run, and inequality in the short-run followed by equality and prosperity in the long run.