659338

Channels through Which Human Capital Inequality Influences Economic Growth
Author(s): Amparo Castelló-Climent

Source: Journal of Human Capital, Vol. 4, No. 4 (December 2010), pp. 394-450
Published by: The University of Chicago Press
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Channels through Which Human Capital
Inequality Influences Economic Growth
Amparo Castelló-Climent
University of Valencia
This paper empirically investigates the theoretical predictions of some of the

channels through which human capital inequality may discourage investment
and growth. In a cross section of countries over the period 1960–2000, findings
reveal that, all other things being equal, a greater degree of human capital
inequality increases fertility rates and reduces life expectancy, which in turn
hampers the accumulation rates of human capital. This effect is reinforced in
the countries where individuals find it difficult to access credit. Extensive sen-
sitivity analyses show that the results are robust across specifications and are not
driven by atypical observations, endogenous regressors, or unobservable hetero-
geneity.
I. Introduction
This paper takes available data for human capital inequality for a broad
number of countries and periods to disentangle the underlying mech-
anisms through which human capital inequality influences human cap-
ital investment and growth.1 In particular, several theoretical studies (De
la Croix and Doepke 2003; Moav 2005; Castelló-Climent and Doménech
2008) have addressed the relationship between inequality in the distri-
bution of human capital, demographic indicators, and human capital
I am grateful to Raquel Carrasco, Francesco Caselli, Rafael Doménech, Javier Ferri, two
anonymous referees, and the editors, Mathias Doepke and Isaac Ehrlich, for their helpful
comments and suggestions. I acknowledge the hospitality of the Centre for Economic
Performance at the London School of Economics, where part of this research was con-
ducted. I would also like to thank the participants at the twenty-second annual congress
of the European Economic Association (Budapest) and XXII European Society for Pop-
ulation Economics (London) for fruitful discussions. Financial support from the Spanish
Ministry of Education and Science grant ECO2008-02675 and from the Ramón y Cajal
Programme is also gratefully acknowledged.
1
The use of human capital inequality measures restricts the analysis to the channels
in which human capital inequality is relevant for growth, leaving out of the scope of this
study other mechanisms such as the fiscal policy approach (e.g., Bertola 1993; Alesina and
Rodrik 1994; Persson and Tabellini 1994), in which inequality is driven by wealth inequality
and mainly affects physical capital investment rates. See Benabou (1996) and Aghion,
Caroli, and Garcı́a-Peñalosa (1999) for an extensive survey on the theories that relate
inequality and growth.
[Journal of Human Capital, 2010, vol. 4, no. 4]

䉷 2010 by The University of Chicago. All rights reserved. 1932-8575/2010/0404-0003$10.00
394
Human Capital Inequality Influences Economic Growth 395
Figure 1.—Fertility channel
investment rates. Nevertheless, the empirical evidence on this issue is

scarce despite the striking correlation between these variables.
As preliminary evidence, figures 1 and 2 show that countries with a
greater degree of human capital inequality in 1960 record the highest
fertility rates and lowest life expectancy rates in subsequent years. In
line with the predictions of the theoretical models, high fertility rates
and low life expectancy are related to lower subsequent human capital
396 Journal of Human Capital
Figure 2.—Life expectancy channel
accumulation rates. Indeed, these correlations are very strong and sug-
gestive, but they do not provide conclusive evidence because of the
problem of omitted variables. However, the empirical analysis aims to
identify economic mechanisms supporting a link between human capital
inequality, fertility, longevity, and growth.
More specifically, demographic mechanisms suggest that greater in-
equality in the distribution of education is related to greater fertility,
lower life expectancy, and lower rates of investment in human capital.
A wide range of sensitivity tests show that the strong correlation between
these variables, displayed in figures 1 and 2, is not driven by the omission
of relevant variables from the analysis. It is robust to different specifi-
cations and different measures of human capital inequality, and it holds
with a measure of differential fertility instead of total fertility rates (e.g.,
De la Croix and Doepke 2003) and a measure of adult mortality instead
of life expectancy (e.g., Lorentzen, McMillan, and Wacziarg 2008). Fur-
thermore, it is not driven by atypical observations, endogenous regres-
sors, or unobservable heterogeneity. As expected, when the sample is
split between poorer and richer economies, the evidence shows that
these mechanisms have stronger support in less developed countries
where differences in fertility and life expectancy among individuals with
different levels of education are larger.
Even though demographic channels have strong support in the data,
other mechanisms are also found to have room. For instance, human
capital inequality coupled with credit market constraints may also in-
fluence investment and growth. More specifically, when credit-restricted
individuals find it difficult to finance a profitable investment project,
the initial distribution of wealth determines the average investment rate
in the economy.2 Moreover, in Galor and Zeira’s (1993) model, wealth
transmission from parents to children depends on the parents’ human
capital. As a result, the initial distribution of wealth is mainly driven by
the initial distribution of human capital. In line with Levine, Loayza,
and Beck (2000), results suggest that more financial development en-
courages investment and boosts growth. However, it is shown that this
effect is stronger in countries in which inequality in the distribution of
human capital is greater. At the same time, it is also found that the
negative effect of human capital inequality on growth is stronger in
countries where the financial system is less developed.
By estimating the structural form of the model, I decompose the total
effect of human capital inequality on the investment rates in human
capital into its different components and assess the sign and the mag-
nitude of each channel, taking into account other competing mecha-
nisms. When I control for other determinants of human capital invest-
ment, results suggest that an increase in one standard deviation in the
human capital Gini index in 1960 (equal to 0.28) reduced the average
enrollment rates in secondary education over the period 1980–2000 by
0.13 points. This effect is relevant in quantitative terms given that, for
example, the average enrollment rate in secondary education in sub-
Saharan African countries during that period was 0.27. In fact, if human
capital inequality in sub-Saharan African countries (0.80) had been re-
duced to that of the high-income OECD countries (0.24), the human
2
Although the source of inequality in the credit market constraint models is that of
wealth inequality, the difficulty of using human capital as collateral and the fact that its
returns are spread over the long run make the credit market imperfection approach
particularly important in human capital–based models.
capital investment rate in this African region would have increased by

0.26 points. In an analysis of the mechanism that may account for that
effect in a cross section of 83 countries, the evidence indicates that the
fertility channel explains about half of the total effect of human capital
inequality on the investment rates in human capital. The life expectancy
channel is also important although less relevant in quantitative terms.
Furthermore, the degree of financial development determines the way
human capital inequality influences human capital investment rates; the
adverse effect of greater inequality is reinforced when individuals find
it difficult to gain access to credit. When I test the channels in a more
formal way, results show that the sum of the structural estimates derived
from the effect of the channels is very close to that of the reduced form
of the model. In fact, a Wald test for the null hypothesis that both
coefficients are equal always fails to reject the null.
As an additional robustness check, the relevance of the fertility, life
expectancy, and credit market imperfection mechanisms is analyzed in
standard growth equations through estimating dynamic panel data mod-
els that control for country-specific effects. Overall, results show that
demographic channels and the credit market imperfection approach
are able to explain the entire impact of human capital inequality on
economic growth, which is considerable in quantitative terms; a one-
standard-deviation increase in the human capital Gini index (equal to
0.26) is associated with a 1.48-percentage-point decrease in growth.
This paper is closely related to the literature that predicts causality
from inequality to growth.3 However, in line with the influential paper
by Kuznets (1955), another branch of literature suggests that causality
goes the opposite way. The Kuznets hypothesis maintains that the re-
lationship between inequality and development will display an inverted
U shape as the population moves from the agricultural to the industrial
sector; that is, inequality in the distribution of income increases and
later decreases as per capita income rises.4 There are other theories,
mainly based on the behavior of the supply of and demand for different
kinds of labor, that also explain the evolution of earnings inequality.5
Finally, a third viewpoint suggests that the relationship between income
inequality and economic growth is associative and not causal. Ehrlich
3
The main mechanisms through which inequality may influence growth include credit
market imperfections (Galor and Zeira 1993); changes in the demand for redistribution
through fiscal policy (e.g., Alesina and Rodrik 1994; Persson and Tabellini 1994); political
instability (Alesina and Perotti 1996); and differentials in fertility (De la Croix and Doepke
2003) and life expectancy (Castelló-Climent and Doménech 2008) among individuals.
4
The evidence regarding the Kuznets hypothesis has been mixed: while some papers
have challenged the existence of an inverted-U shape between inequality and development
(e.g., Anand and Kanbur 1993; Deininger and Squire 1998), other papers find some
evidence in favor of the Kuznets curve (e.g., Barro 2000).
5
The main explanations for changes in earnings inequality are based on the impact
of trade (Wood and Ridao-Cano 1999), skill-biased technological change (Eicher 1996),
and organizational changes within firms (Kremer and Maskin 1996; Lindbeck and Snower
1996; Acemoglu 1999). See Aghion et al. (1999) for a survey on this literature.
and Kim (2007) show a growth-equilibrium steady state in which both

growth and inequality are simultaneously determined. Indeed, in this
model the distribution of fertility is determined simultaneously with the
distribution of investment in human capital and per capita income
growth. In order to identify a causal effect from inequality to growth,
this paper uses instrumental variables and estimates structural equations
to disentangle some of the mechanisms that predict a negative effect
of human capital inequality on economic growth. For instance, I test
whether, other things being equal, the initial distribution of human
capital has any influence on future fertility rates and life expectancy
and whether the fertility rates and life expectancy influence next-
generation human capital investment. In particular, I estimate a system
of equations with lagged explanatory variables and test whether fertility
and life expectancy can be treated as exogenous variables.
So far, most of the empirical literature on the influence of inequality
on growth has documented a reduced-form relationship in which an
income inequality variable is added to the set of explanatory variables
in a standard growth equation. However, estimating the reduced form
of the model sheds no light on the underlying mechanism through
which inequality influences investment and growth. In fact, theoretical
arguments point to several competing channels, and estimating the re-
duced form does not yield any information regarding which mechanism
is important or how it influences this link. Moreover, the lack of available
data for wealth and asset inequality for a broad number of countries
and periods has forced empirical studies to use income inequality mea-
sures instead (e.g., Persson and Tabellini 1994; Barro 2000; Banerjee
and Duflo 2003).6 The problem with these measures is that they have
been highly criticized for being low quality and scarce for a large part
of the world, which increases the probability that estimators will suffer
from measurement error and sample selection bias.7 In addition, the
final effect of income inequality on economic growth is still under de-
bate; while cross-section regressions report that greater income inequal-
ity has a negative impact on the growth rates of per capita income, panel
data models that control for country-specific effects suggest that the
relationship between income inequality and economic growth is positive
(Forbes 2000).8
6
In Alesina and Rodrik (1994) and Deininger and Squire (1998), the distribution of
wealth is also proxied by the distribution of land.
7
Atkinson and Brandolini (2001) have warned about measurement error in cross-
country regressions when using income inequality data. In fact, these authors show that
even the high-quality data in Deininger and Squire (1996) for OECD countries have
problems, as definitions and data collection methods differ across countries. The paper
by Voitchovsky (2005) is one of the few studies to use comparable data on income inequality
measures from the Luxembourg Income Study (LIS). She finds that the lower and the
upper parts of the income distribution have different effects on economic growth. How-
ever, the LIS data set is available for only a small number of wealthy economies.
8
Forbes’s (2000) results also questioned the findings made by Perotti (1996), who was
the first to attempt to estimate structural forms using income inequality measures.
In order to gain a better understanding of the link between inequality

and growth, this paper is more specific and focuses on a particular type
of inequality, namely, inequality in the distribution of education, and
formally tests some of the theoretical models that predict a negative
effect of human capital inequality on economic growth. By estimating
a structural form, the paper is able to disentangle how human capital
inequality influences growth through its impact on human capital in-
vestment rates. The findings reveal that human capital inequality is
significantly related to subsequent fertility and life expectancy, and fer-
tility and life expectancy are significantly associated with future human
capital investment rates. Furthermore, this negative effect is reinforced
in countries with less developed financial systems.
The paper is structured as follows. Section II summarizes the predic-
tions of the theoretical models that relate human capital inequality and
economic growth. Section III describes the model and discusses some
econometric issues. In a cross section of countries, Section IV presents
the empirical evidence on the channels through which human capital
inequality may discourage human capital investment. Section V exam-
ines a sensitivity analysis of the results. Concerns about country-specific
effects are addressed in Section VI, in which a dynamic panel data model
for a growth equation is estimated. Finally, Section VII states the con-
clusions reached.
II. Theoretical Predictions
A. Demographic Channels
1. Fertility Channel
The joint decision between fertility and education builds on the well-
known quality-quantity trade-off argument. In the early 1970s, Becker
and Lewis (1973) showed that increases in income may cause a reduction
in fertility (quantity) along with a rise in the investment in each child
(quality). This pioneering work was followed by a dynastic model of the
linkages in fertility rates and capital accumulation across generations
by allowing the utility function of parents to depend not only on their
own consumption but also on the utility of each child and the number
of children (Becker and Barro 1988). More recent work on the quality-
quantity trade-off includes the paper by Becker, Murphy, and Tamura
(1990), who were the first to develop an endogenous growth theory
with endogenous fertility capable of generating multiple steady states:
a Malthusian underdeveloped steady state with high birth rates, low
human capital investment and no growth, and a developed regime with
lower fertility rates, abundant stocks of human capital, and positive
growth. Nevertheless, the investment in human capital in this model is
not influenced by parents’ level of education since all the individuals
in a poor country converge to a low education equilibrium and the

opposite is true for all the individuals in a rich economy.
However, differentials in demographic variables among individuals
who belong to different socioeconomic strata matter because they may
influence the accumulation of factors. For instance, De la Croix and
Doepke (2003) analyze the effect of inequality on growth through fer-
tility decisions. In this model, poor parents with low levels of education
decide to have more children and provide them with less education,
whereas rich parents’ decisions are characterized by fewer and more
educated children. The reason is that the opportunity cost of raising a
child increases with parents’ education. As a result, parents with low
human capital decide to have more children with less education than
parents with more human capital. This differential fertility between par-
ents with low and high levels of education implies that a mean-preserving
spread in the distribution of parents’ education will increase the pro-
portion of less educated individuals in future generations, which will
diminish future human capital in the economy. Therefore, if differential
fertility between the educated rich and the uneducated poor increases
with inequality, countries with a greater degree of inequality in the
distribution of education will accumulate less human capital. Similar
results are obtained by Moav (2005), who assumes that individuals’ pro-
ductivity as teachers increases with their own human capital, whereas
the minimum amount of time devoted to raising a child is not influenced
by parents’ level of education. As a result, educated parents have a
comparative advantage in raising quality or educated children. Hence,
poor parents choose quantity instead of quality, that is, high fertility
rates with low investment in their offspring’s education, depriving their
descendants of future opportunities.
Overall, in these models the aggregate behavior of the economy de-
pends on the initial distribution of education. Other things being equal,
economies with greater inequality in the distribution of education will
have higher fertility rates and higher differential fertility between low-
and high-educated parents, will accumulate less human capital, and will
have a lower rate of economic growth. A basic econometric specification
for an empirical analysis of the fertility channel could be written as
follows:
Ḣ p a 0 ⫹ a 1 FERTILIT Y ⫹ a 2 D ⫹ m,
(1)
FERTILIT Y p b 0 ⫹ b 1 INEQUALIT Y ⫹ b 2 X ⫹ n,
h
where Ḣ is the human capital investment rate and D and X account for
additional controls. Taking into account other determinants of fertility
and human capital accumulation, we should expect a greater degree of
human capital inequality to lead to higher fertility rates (b 1 1 0) and
higher fertility rates to be associated with lower rates of human capital
investment (a 1 ! 0).
Instead of analyzing a specific direction of causality, more recently,

other papers have studied the joint evolution of fertility, longevity, and
human capital investment over all the phases of economic development.
In a Malthusian framework, Ehrlich and Kim (2005) account for the
possibility that an economy gets stuck in a Malthusian stagnant equilib-
rium, with high fertility and mortality rates and low human capital in-
vestment. External shocks that change the value of basic production
and cost parameters allow for the possibility of the economy taking off
and transiting to a persistent growth regime with low fertility and mor-
tality and continuous economic growth. Ehrlich and Kim (2007) extend
the model by Ehrlich and Lui (1991) to a heterogeneous-family case
that allows interfamily interactions and show that the shape of income
distribution over the transitional development path, which is linked to
the corresponding distribution of human capital attainments, varies de-
pending on the exogenous factors that generate the transitional devel-
opment phase and their impact on fertility and human capital invest-
ment. Indeed, in this model the distribution of fertility is determined
simultaneously with the distribution of investment in human capital and
per capita income growth.
While causality exists in the first type of models, running from an
initial distribution of human capital or income to the subsequent growth
rates, in the latest models exogenous parameters trigger the takeoff
from a stagnant equilibrium to a sustained growth rate, and the evo-
lution of all the variables in the transitional period is determined en-
dogenously. The aim of this study is not to discriminate between the
models that predict a causal effect and those that suggest an associative
relationship. In fact, even in the first type of models, fertility decisions
will determine human capital investment across individuals and, there-
fore, the distribution of human capital in the next generation, which
in turn will influence future generations’ fertility rates and so on. Thus,
in the empirical section I will test whether, other things being equal,
an initial distribution of human capital has any influence on future
fertility rates and whether the fertility rates influence next-generation
human capital investment. In particular, I will estimate a system of equa-
tions with lagged explanatory variables and will test whether fertility and
life expectancy can be treated as exogenous variables.
2. Life Expectancy Channel

In spite of the strong correlation between human capital inequality and
life expectancy, until recently theoretical models have not explored the
link between inequality, life expectancy, and growth. Some exceptions
are the papers by Galor and Mayer-Foulkes (2004) and Chakraborty and
Das (2005), which focus on explaining the role of health investment in
the persistence of inequality across generations. In both models, im-
perfections in the credit or annuities markets are needed to generate
poverty persistence. In a context of perfect capital markets, Castelló-

Climent and Doménech (2008) analyze a channel that connects in-
equality and growth through differences in life expectancy among in-
dividuals of different socioeconomic status. In line with the empirical
evidence, life expectancy is assumed to be conditioned by the human
capital of the families that individuals are born into (e.g., Case, Lubotsky,
and Paxson 2002; Currie and Moretti 2003). Bearing in mind the ex-
pected probability of survival, individuals optimally choose the invest-
ment in education that maximizes their intertemporal utility. The pre-
dictions of the model show that individuals born into a poor uneducated
family have low life expectancy and optimally invest in a low amount
of human capital, since their low life expectancy increases the oppor-
tunity cost of becoming educated. On the contrary, rich individuals have
more incentives to invest in human capital since the time horizon for
enjoying the returns of education is longer. Moreover, a mean-preserving
spread in survival probability reduces average human capital in the
model, which implies that the initial distribution of education affects
average human capital not only in the long run but also in the transition
to the steady state.
Thus, this channel predicts that greater inequality in the initial dis-
tribution of education will lower subsequent average human capital
investment by reducing a country’s life expectancy. We can capture this
mechanism in two equations with human capital accumulation and life
expectancy as endogenous variables. A basic econometric specification
for an empirical analysis of the life expectancy channel could be written
as follows:
Ḣ p g 0 ⫹ g 1 LIFE EXPECTANCY ⫹ g 2 D ⫹ m,
(2)
LIFE EXPECTANCY p c 0 ⫹ c 1 INEQUALIT Y ⫹ c 2W ⫹ e.
h
We expect, holding fixed other factors, a more unequal distribution of

education to be associated with lower life expectancy (c 1 ! 0), discour-
aging investment in human capital (g 1 1 0).
B. Credit Market Imperfection Approach

The credit market imperfection approach started with the pioneering
model by Galor and Zeira (1993). In this model, the presence of in-
divisibilities in the accumulation of human capital and borrowing con-
straints means that the initial distribution of wealth determines the
average accumulation of human capital and average income in the econ-
omy. The idea is simple: credit constraints will prevent poor individuals
with no collateral from undertaking a profitable investment project,
which implies that a more egalitarian distribution of assets would result
in higher capital investment rates.
It is worth indicating that the seminal paper by Galor and Zeira (1993)
focuses on investment in human capital. In this model, wealth trans-

mission from parents to children through bequests depends on parents’
human capital. As a result, the initial distribution of wealth could be
driven by the initial distribution of human capital as well.9 However, the
credit market imperfection approach can be extended to all types of
investment, including physical capital accumulation, as stated, for ex-
ample, in the model by Piketty (1997).10 Therefore, as measures of
human capital inequality will be used throughout the paper, the pre-
dictions of the theoretical models tested in the empirical analysis rest
on the assumption that human capital is the only production factor and
the main source of wealth. This assumption is not that restrictive given
that the difficulty of using human capital as collateral and the fact that
its returns are spread over the long run make the credit market im-
perfection approach particularly important in human capital–based
models.
According to these considerations, the effect of inequality on the
human capital investment rate will depend on the degree of credit
constraints. The following econometric specification could capture this
mechanism:
Ḣ p k 0 ⫹ k 1 INEQUALIT Y h ⫹ k 2 CMC ⫹ k 3 INEQUALIT Y h # CMC

(3)
⫹ k 4 D ⫹ m,
where CMC stands for credit market constraints. In line with this ap-
proach, we should find that the negative effect of a more unequal dis-
tribution of education on investment rates (k 1 ! 0) is higher the greater
the degree of imperfection in the credit market (k 3 ! 0). Likewise, the
growth and investment enhancement effect of lower restrictions in the
credit market should be greater in societies with a more unequal dis-
tribution of human capital.
III. Analysis of the Channels
A. Model Specification
In order to decompose the total effect of human capital inequality on

investment rates in human capital into its different components, I assess
the sign and the magnitude of each channel, taking into account other
competing mechanisms. A system of equations that accounts for the
9
Mookherjee and Ray (2003) also include credit market imperfections in a model of
human capital accumulation.
10
Other models that analyze the relationship between credit market imperfection and
wealth inequality include Banerjee and Newman (1993) and Aghion and Bolton (1997).
fertility, life expectancy, and credit market imperfection approaches can

be summarized as follows:
Ḣi,t p a 0 ⫹ a1 ln yi,t⫺t ⫹ a 2 Educi,t⫺t ⫹ a 3 PSEi,t⫺t
⫹ a 4 FERTi,t⫺k ⫹ a 5 LEi,t⫺k ⫹ a 6 Ginii,t⫺t

h
⫹ a 7 FDi,t⫺k (4)
⫹ a 8 Ginihi,t⫺t # FDi,t⫺k ⫹ mi,t,
FERTi,t⫺k p b 0 ⫹ b1 ln yi,t⫺t ⫹ b2 Educi,t⫺t ⫹ b3 Ginihi,t⫺t

(5)
⫹ bX
i i,t⫺t ⫹ ni,t⫺k ,
LEi,t⫺k p r 0 ⫹ r1 ln yi,t⫺t ⫹ r 2 Educi,t⫺t ⫹ r 3 Ginii,t⫺t

h
⫹ rW
i i,t⫺t ⫹ ei,t⫺k , (6)
with k ≤ t. In equation (4), the dependent variable is the average
11
investment rate of human capital (Ḣi,t). The set of controls includes the
initial level of per capita income (ln yi,t⫺t), since initial inequality could
be picking up the level of development; the initial human capital stock
(Educi,t⫺t), given that the Gini coefficient could be picking up an average
human capital effect instead of a distributional effect; the percentage
of public spending on education (PSEi,t⫺t); and the variables of interest
such as total fertility rates (FERTi,t⫺k), a measure of life expectancy
h
(LEi,t⫺k), the human capital Gini coefficient (Ginii,t⫺t ), and a measure
of the degree of financial development (FDi,t⫺k). The controls that may
also help to explain fertility rates (X i,t⫺t) and life expectancy (Wi,t⫺t) will
be discussed below.
The fertility channel predicts that a mean-preserving spread in the
distribution of education will give more weight to individuals with low
levels of schooling, who tend to have a greater number of children and
invest less in their education. Thus, we expect, on the one hand, greater
inequality in the distribution of education to be associated with higher
fertility rates (b3 1 0) and, on the other hand, that higher fertility is
associated with lower investment in human capital (a 4 ! 0). The life
expectancy mechanism states that the positive effect of parents’ edu-
cation on their offspring’s probability of survival decreases as parents’
education increases. Thus, a mean-preserving spread in the distribution
of education reduces average life expectancy (r 3 ! 0). Moreover, a
longer life span to enjoy the returns of education encourages investment
in human capital (a 5 1 0).
According to the credit market imperfection channel, in countries
where external funds to finance a profitable investment project are
11
To minimize simultaneity biases the whole sample period is split into two subperiods
of equal length, 1960–80 and 1980–2000. The specification differentiates between k and
t because fertility, life expectancy, and financial development are measured as an average
over the period 1960–80 and the initial levels of income, education, and inequality are
measured in 1960.
difficult to obtain, the greater the number of individuals who are re-
stricted in the financial market, the lower the average investment rate
in the economy (e.g., Galor and Zeira 1993). Consequently, we should
find the negative effect of inequality on investment rates to be higher
the greater the financial restrictions in the economy. When taking these
predictions to the data, the first difficulty faced is the absence of data
on credit market constraints for a sufficient number of countries and
periods. Thus, because of data limitations, it has been common in the
literature to use financial development as a proxy for credit constraints.12
Following this literature, I also measure credit market restriction
through a variable of financial development (FDi,t⫺k), which equals the
value of credit by financial intermediaries to the private sector divided
by GDP. As the financial system is more developed, we expect there to
be fewer restrictions to access credit.
The credit market imperfection approach suggests that the effect of
inequality on growth will depend on the availability of individuals to
access credit. Thus, I include the variable FD interacted with the Gini
coefficient, implying that the negative influence of inequality on growth
will be greater the higher the degree of imperfection in the credit
market. As more financial development should be negatively correlated
to credit constraints, we expect the coefficient of FD # Ginih to be
positive (a 8 1 0) and the coefficient of the Gini index to be negative
(a 6 ! 0).
We may assess the influence of every channel by substituting the
demographic mechanisms into the whole model and by testing for the
equality of the coefficients of interest. Substituting equations (5) and
(6) into (4), we obtain the reduced form of the model:
Ḣi,t p g0 ⫹ g1 ln yi,t⫺t ⫹ g2 Educi,t⫺t ⫹ g3 PSEi,t⫺t
⫹ g4 X i,t⫺t ⫹ g5Wi,t⫺t ⫹ g6 Ginihit⫺t ⫹ g7 FDi,t⫺k (7)
⫹ g8 Ginihit⫺t # FDi,t⫺k ⫹ hi,t,
12
For example, Iyigun and Owen (2004) use measures of financial development to
examine the role of credit restrictions in explaining the different effects of income dis-
tribution on the variability of aggregate consumption growth in low- and high-income
countries. Flug, Spilimbergo, and Wachtenheim (1998) examine the effect of economic
volatility and credit constraints on investment in education. In a cross section of countries
over the period 1970–92, Flug et al. find that credit constraints, measured as the ratio of
the financial system’s liquid liabilities to GDP, have a negative effect on human capital
investment.
where
g0 p a 0 ⫹ a 4 # b 0 ⫹ a 5 # r 0 ,
g1 p a1 ⫹ a 4 # b1 ⫹ a 5 # r1 ,
g2 p a 2 ⫹ a 4 # b2 ⫹ a 5 # r 2 ,
g3 p a 3 , g4 p a 4 # bi , g5 p a 5 # ri,
g6 p a 4 # b3 ⫹ a 5 # r 3 ⫹ a 6 ,
g7 p a 7 , g8 p a 8 ,
hi,t p a 4 # ni,t⫺k ⫹ a 5 # ei,t⫺k ⫹ mi,t .
This model specification has the advantage that it allows for a simple
test of how human capital inequality influences the accumulation of
human capital: if g6 p a 4 # b3 ⫹ a 5 # r 3 ⫹ a 6, that is, if the reduced-
form estimate is close to the sum of the structural estimates, the results
are consistent with the conjecture that most of the impact of human
capital inequality indeed runs through the described channels. Thus,
the total effect of inequality will be the sum of all the mechanisms. The
contribution of the fertility channel is the effect of the Gini coefficient
on fertility multiplied by the effect of fertility on the accumulation of
human capital (a 4 # b3). The importance of the life expectancy mech-
anism is computed by the effect of the human capital inequality indi-
cator on life expectancy multiplied by the effect of life expectancy on
human capital investment rates (a 5 # r 3). Finally, the effect of inequality
on human capital investment rates will also depend on the degree of
financial development, as ⭸H˙ i,t/⭸Ginii,t⫺t
h
p a 6 ⫹ a 8 FDi,t⫺k.
B. The Data
The analysis of the channels is tested in a cross section of 83 countries

for which data are available over the period 1960–2000. In Section IV,
the robustness of the results is also examined in a growth equation with
the estimation of a dynamic panel data model that includes 102 econ-
omies. The data used to proxy the main variables in the model are
described below. Table A1 in the Appendix summarizes the descriptive
statistics of the main variables. Table A2 reports the description and
data sources of all the variables, and table A3 lists the countries included
in each sample.
Human capital accumulation (Ḣ ).—The investment rate in human capital
is measured using the total gross enrollment rates in secondary education
taken from Barro and Lee (1994) and updated by the United Nations
Educational, Scientific, and Cultural Organization (UNESCO).13
Human capital inequality (Ginih).—Castelló and Doménech (2002)
compute the Gini coefficient and the distribution of education by quin-
tiles using data on average schooling years and the attainment levels
from Barro and Lee’s (2001) data set.14 Following this procedure, I
update the inequality measures using the latest version of Barro and
Lee (2010). The Gini index takes values from zero to one; the higher
the index, the greater the degree of inequality. One of the shortcomings
of the Gini index is that it is an aggregate measure of inequality. As a
result, an increase or decrease in its value may be due to a shift at the
top end or to a movement at the bottom end of the distribution. Thus,
so as to complement the information provided by the Gini index, I also
test the robustness of the results with alternative measures of inequality,
such as the share of education that goes to the first, third, and fifth
quintiles and the ratio between the bottom and the top quintiles of the
distribution of education.
Income (ln y).—The level of income is measured using the log of real
GDP per capita (in 2005 constant prices: chain series). Source: Penn
World Table version 6.3.
Education (Educ).—Average years of secondary schooling of the total
population aged over 25. Source: Barro and Lee (2010).
Public spending on education (PSE).—Total public spending on edu-
cation as a percentage of GDP. Source: Barro and Lee (1994).
Fertility rates (FERT).—Total fertility rates are proxied by total births
per woman, taken from the World Development Indicators, and by fer-
tility differentials between women with the highest and lowest levels of
education, computed by Kremer and Chen (2002).
Life expectancy (LE).—Life expectancy at birth indicates the number
of years a newborn infant would live if prevailing patterns of mortality
at the time of his or her birth were to stay the same throughout life.
Source: World Development Indicators.
Financial development (FD).—The degree of financial development is
proxied by private credit by deposit money banks and other financial
13
The secondary school enrollment rate has been commonly used as a proxy for human
capital investment since the seminal work of Mankiw, Romer, and Weil (1992). Moreover,
the fact that primary schooling is compulsory in most countries and has a relatively low
opportunity cost makes secondary education the best measure to test the influence of
fertility and life expectancy on education decisions. Nevertheless, I will test the robustness
of the results with alternative measures of human capital investment rates.
14
The human capital Gini coefficient (Gh) can be computed as follows:
冘冘
3 3
1
Gh p Fxˆ i ⫺ xˆ jFninj,
2H ip0 jp0
where H stands for the average schooling years of the population aged 25 years and over;
i and j for the different levels of education (no schooling, primary, secondary, and higher
education); ni and nj for the shares of population with a given level of education; and
xˆ i and xˆ j for the cumulative average schooling years of each level of education.
institutions to GDP. Source: Levine et al. (2000) and Beck, Demirgüc-

Kunt, and Levine (2009).
C. Estimation Strategy
In order to implement a convincing empirical test, the following econ-

ometric issues are taken into account. The first concern is related to
the problem of omitted variables. On the one hand, I control for an
extensive number of variables that have been suggested in the literature
as relevant determinants of life expectancy, fertility, and investment
rates. This is important because if other variables that affect the de-
pendent variable and are related to human capital inequality are omitted
from the analysis, the estimated coefficient of the explanatory variables
could be biased. On the other hand, I take into account cultural and
specific characteristics of countries that could potentially be correlated
with inequality and that, if omitted, may bias the estimated coefficients.
As most of the mechanisms analyzed in this paper have an effect in the
medium and long term, I test the different channels over a long time
span and control directly for time-invariant variables that may proxy for
fixed effects. Moreover, as suggested by Temple (1998), I also control
for regional dummies in Latin American, sub-Saharan African, and Asian
countries since their patterns of growth and development have been
different.15 For example, sub-Saharan African countries are character-
ized by high human capital inequality and fertility rates, low life ex-
pectancy, and low investment rates in education. In order to avoid the
strong correlation among these variables from being driven by a sub-
Saharan African effect, we need to control for a dummy that collects
any particular characteristic of this region.
Second, equations (4)–(7) described above define a recursive system.
If the error terms are uncorrelated, applying ordinary least squares
(OLS) to each equation is both a consistent and an efficient method
of estimation. I divide the whole sample period into two subperiods of
equal length so that the explanatory variables are measured with a suf-
ficient number of lags to ensure that E[mi,tni,t⫺k] p 0 and E[mi,t ei,t⫺k] p
0. I report the results of the estimation of the system of equations
applying OLS to each separate equation. Nevertheless, so as to ensure
that results are not driven by reverse causation, I also use an instrumental
variables (IV) approach. Moreover, I estimate a system of simultaneous
equations since these techniques take into account possible cross-equa-
tion error correlations, which allows computing the quantitative effect
of each channel taking into account other competing mechanisms. I
report the three-stage least-squares estimates (3SLS), which uses the
15
In the relationship between income inequality and economic growth, Castelló and
Doménech (2002) show that when regional dummies enter a growth equation, the negative
coefficient of the income Gini index is no longer statistically significant.
estimated covariance matrix from the second stage as a weighting matrix

and the instruments in the first stage to estimate the equations in the
structural model. This estimator achieves consistency if instruments are
appropriate and efficiency through optimal weighting. I also use the
seemingly unrelated regression (SUR) estimator, which jointly estimates
the system of equations but without instrumenting for any variable.
These methods are more efficient than single-equation methods since
they use all the information in the model. However, if there is any
misspecification problem in any single equation, it will affect the esti-
mates in all the equations. I report a Wald test for the nonlinear hy-
pothesis that the effect of human capital inequality on human capital
investment rates derived from the sum of the coefficients in the struc-
tural equation is equal to that of the reduced form of the model.
Finally, so as to ensure that the results are not driven by omitted
variable biases or contaminated by endogenous regressors, in Section
VI, I estimate a dynamic growth equation with a generalized method of
moments (GMM) estimator that is specially designed to address these
econometric concerns. In particular, I will utilize the system GMM es-
timator proposed by Arellano and Bover (1995) and Blundell and Bond
(1998), which combines a system of equations that include regressions
in differences with regressions in levels.16 The consistency of this esti-
mator hinges on the validity of the instruments and on the assumption
that the error is not second-order serially correlated. I test the validity
of moment conditions by using the conventional test of overidentifying
restrictions proposed by Sargan (1958) and Hansen (1982) and by test-
ing the null hypothesis that the error term is not second-order serially
correlated. Furthermore, I test the validity of the additional moment
conditions associated with the level equation using the difference Han-
sen test.
I check the sensitivity of the results to alternative instruments, mea-
sures of human capital inequality, fertility rates, and financial devel-
opment indicators. Moreover, I analyze whether the channels have stron-
ger support in poorer countries than in wealthier nations, and to ensure
that the evidence is not driven by atypical observations, I test the ro-
bustness of the results for the presence of outliers.
IV. Empirical Results

A. Fertility Equation
Table 1 presents the parameter estimates for the effect of human capital
inequality on fertility rates. As stated above, in order to mitigate potential
16
In the system GMM estimator, the equations in first differences eliminate the fixed
effect in the model. Moreover, the difference equations are combined with equations in
levels, which are instrumented with the lagged first differences of the corresponding
explanatory variables.
TABLE 1
Dependent variable: Average Fertility Rates, 1960–80
FERT60–80 Diff. FERT80
(1) (2) (3) (4) (5) (6) (7)
Ginih60 4.956* 4.333* 3.330* 3.604* 2.891* 2.553* 2.522**
(.404) (.541) (.771) (.783) (.700) (.652) (1.179)
ln y60 ⫺.134 ⫺.039 .161 ⫺.055 ⫺.226
(.204) (.208) (.246) (.223) (.577)
Educ60 ⫺.303*** ⫺.281*** ⫺.176 .057 .293
(.163) (.162) (.173) (.158) (.267)
Infant
mortality60 .008 .005 .000 ⫺.012***
(.005) (.005) (.005) (.007)
Urbanization60 ⫺.015*** ⫺.002** ⫺.003
(.008) (.008) (.020)
Muslim .020* .020*
(.004) (.007)
Catholic .005 .011
(.004) (.008)
Protestant .005 ⫺.002
(.005) (.009)
LaAm 1.267* 1.060* .875* .972* 1.384* 2.049* 2.424*
(.25) (.247) (.260) (.263) (.308) (.394) (.536)
SAfrica .886** .660*** .571 .487 .766** ⫺.008 .757
(.351) (.373) (.375) (.379) (.326) (.536) (.558)
Asiae .067 ⫺.134 .016 .051 .240 ⫺.022 .343
(.515) (.513) (.493) (.465) (.425) (.412) (.495)
Constant 1.742* 3.472*** 2.580 1.546 3.400** .317 2.128
(.193) (1.844) (1.908) (1.974) (1.678) (.258) (4.074)
Countries 83 83 83 83 83 51 51
R2 .759 .771 .780 .790 .834 .533 .625
Note.—OLS estimation. Robust standard errors are in parentheses. Dependent variable
is total fertility rates, averaged over the period 1960–80 in cols. 1–5, and differential fertility,
measured in 1980, in cols. 6 and 7.
* Significance at 1 percent.
** Significance at 5 percent.
*** Significance at 10 percent.
problems of endogenous regressors and reverse causation, fertility rates

are measured as an average over the period 1960–80 and the explanatory
variables are measured in 1960. Consistent with the fertility channel,
column 1 shows that initial human capital inequality is a significant
predictor of fertility; the estimated coefficient of the human capital Gini
index is positive and statistically significant at the 1 percent level. Nev-
ertheless, the coefficient might be biased because of omitted variables
since the Gini coefficient could be picking up the effect of the initial
level of development or the average level of schooling. Column 2 shows
that even after controlling for the level of per capita income and the
average years of secondary education, results remain practically un-
changed: countries with more human capital inequality in the sense of
a higher Gini index tend to have higher fertility rates.
One of the most controversial variables suggested by the literature to
influence fertility rates is infant mortality. On the one hand, several
theoretical papers predict a causal effect from infant mortality on fertility

rates (see, e.g., Sah 1991; Kalemli-Ozcan 2003).17 However, when fertility
is chosen sequentially and the strategy is to replace those children who
die early in life, net fertility, that is, the number of surviving children,
may not be reduced when infant mortality falls (see Doepke 2005; Galor
2005).18 In the context of this paper, as the correlation between the
human capital Gini coefficient and infant mortality rates is very high
(.85), the inequality indicator may be picking up the effect of infant
mortality. Hence, column 3 includes the infant mortality rate as an
explanatory variable. The coefficient of infant mortality is positive but
not statistically significant at the standard levels. Nevertheless, control-
ling for infant mortality does not change the results, and the estimated
coefficient of the Gini index remains sizable and statistically significant
at the 1 percent level.
Microeconomic models of fertility also suggest that whether the par-
ents live in urban or rural areas may affect fertility decisions since the
net cost of child rearing is higher in urban areas. Column 4 includes
the urbanization rate in the set of controls. The results show that this
variable is negatively related to the rate of fertility. However, including
this variable does not have any appreciable effect on the estimated
coefficient of the human capital Gini index.
The main role of the regional dummies in these regressions is to
control for specific characteristics of countries that are unobservable
and that, if omitted, may bias the estimated coefficients. In fact, even
when I control for many determinants of fertility rates, the dummy for
Latin America remains statistically significant, which suggests that coun-
tries in this region share specific and cultural characteristics that influ-
ence their fertility rate. As an additional robustness check for country-
specific effects, I follow Schultz (1997) and include the percentage of
people who profess a religion, for example, the percentage of Catholics,
Muslims, and Protestants. These variables remain quite stable over time
and reflect each country’s cultural values, such as women’s preferences
for working at home and having a large number of children. The results
displayed in column 5 show that women who live in a country where
17
The intuition is that when there is uncertainty regarding child survival, a precau-
tionary demand for children may appear, which implies that higher infant mortality in-
creases fertility rates.
18
Different calibrated versions of the Barro-Becker model of fertility also display con-
tradictory results. For instance, Fernandez-Villaverde (2001) constructs a neoclassical
growth model to analyze the relationship between population dynamics and economic
growth. The quantitative results of the model, parameterized to match English data, show
that a reduction in infant mortality cannot account for the fall in English fertility during
the demographic transition. At odds with this finding is the study by Boldrin and Jones
(2002). These authors depart from Barro and Becker’s model by assuming that the in-
tergenerational external effects run from children to parents; i.e., parents have children
as an investment that guarantees them some economic support when they grow old. As
a result, quantitative experiments show that an increase in infant mortality increases total
fertility rates.
the majority of the population is either Catholic, Muslim, or Protestant

tend to have more children. However, including these variables scarcely
affects the influence of the Gini index on the fertility rates.
The results shown so far suggest that human capital inequality is an
important determinant of fertility rates, and its impact is economically
sizable as well. When the other determinants of fertility are held fixed,
the estimated coefficient of the human capital Gini index is 2.891 and
is statistically significant at the 1 percent level. This indicates that a one-
standard-deviation increase in the human capital Gini index in 1960
(equal to 0.284) is related to a 0.82-point increase in total fertility rates
over the period 1960–80. For example, if human capital inequality in
sub-Saharan African countries (0.800) had been reduced to that of the
high-income OECD countries (0.240), the number of children per
woman in this African region would have decreased by 1.62.
Kremer and Chen (2002) find that fertility differentials between ed-
ucated and uneducated women are greater in countries with higher
levels of inequality. Likewise, De la Croix and Doepke’s (2003) model
also predicts that economies with more dispersion in the initial distri-
bution of human capital have higher differential fertility and accumulate
less human capital. As a further robustness check, in column 6 the
dependent variable is fertility differentials between women with the
highest and lowest levels of education in 1980, taken from Kremer and
Chen (2002). In line with the results for total fertility rates, more human
capital inequality is also associated with subsequently higher differential
fertility between the women with the lowest and highest levels of edu-
cation. This result holds even when I control for the initial level of
development and the average years of secondary schooling. When all
the additional controls are included as explanatory variables, the quan-
titative effect of the Gini index on differential fertility remains sizable
and significant at the standard levels (col. 7). In quantitative terms, it
is estimated that a one-standard-deviation increase in the Gini coefficient
in 1960 would have raised differential fertility rates between high- and
low-educated women by 0.72 points.
B. Life Expectancy Equation

Consistent with the life expectancy channel, column 1 in table 2 shows
a strong association between human capital inequality, measured in
1960, and life expectancy, measured as an average over the period 1960–
80.19 In fact, the human capital Gini coefficient and the regional dum-
mies alone explain about 85 percent of the variation in life expectancy
19
Measuring life expectancy over the period 1960–80 also prevents these data from
being dominated by the AIDS pandemic in the poorest areas of the world. For example,
according to data provided by the United Nations, the countries with the highest AIDS
prevalence, such as Botswana, Uganda, South Africa, Zambia, and Zimbabwe, today have
a life expectancy similar to that in the 1950s.
TABLE 2
Dependent Variable: Average Life Expectancy, 1960–80
(1) (2) (3) (4) (5) (6)
Gini h
60 ⫺26.910* ⫺21.724* ⫺4.149*** ⫺5.370** ⫺5.694** ⫺5.259***
(2.066) (1.899) (2.263) (2.581) (2.727) (2.659)
ln y60 2.983* 1.328* 1.586* 1.393* 1.358*
(.616) (.405) (.455) (.447) (.446)
Educ60 .375 ⫺.004 .083 ⫺.021 ⫺.020
(.746) (.562) (.473) (.511) (.524)
Infant mortality60 ⫺.133* ⫺.137* ⫺.134* ⫺.134*
(.013) (.012) (.013) (.013)
Hospital beds60 ⫺.264 ⫺.274 ⫺.281
(.169) (.171) (.179)
Urbanization60 .015 .016
(.021) (.021)
Political
instability60–80 ⫺4.021***
(2.180)
LaAm ⫺4.727* ⫺3.377* ⫺.135 ⫺.759 ⫺.880 ⫺.574
(1.019) (1.045) (.715) (.871) (.924) (.898)
SAfrica ⫺10.665* ⫺8.017* ⫺6.461* ⫺6.564* ⫺6.482* ⫺6.542*
(1.883) (1.712) (1.185) (1.161) (1.200) (1.218)
Asiae ⫺2.049 .618 ⫺2.012** ⫺2.618* ⫺2.676* ⫺2.555*
(2.633) (2.227) (.885) (.930) (.903) (.905)
Constant 77.352* 48.854* 64.475* 64.656* 65.712* 65.970*
(.820) (5.672) (3.721) (3.495) (3.419) (3.471)
Countries 83 83 83 83 83 83
R2 .846 .882 .957 .959 .959 .961
Note.—OLS estimation. Robust standard errors are in parentheses. Dependent variable
is the average life expectancy during the period 1960–80.
across countries. In the next columns I check the robustness of this

result to alternative specifications.
A large body of literature on the “health gradient” has provided micro
evidence of an association between socioeconomic status and health
(e.g., Marmot et al. 1991). Using data for the United States, Deaton
and Paxson (1999) find that higher income is related to lower mortality.
Likewise, education also seems to have had a negative causal effect on
mortality (Lleras-Muney 2005). In fact, better-educated individuals not
only benefit themselves from the use of more preventive and curative
measures but also use their knowledge in favor of their descendants’
health. Currie and Moretti (2003) show that a mother’s education seems
to be an important factor in reducing child mortality. For example,
better-educated parents may be more aware of nutritional information,
health services, or the importance of hygiene at home. Column 2 adds
per capita income and the average years of secondary schooling in the
set of controls. Results show that holding these variables fixed scarcely
changes the coefficient of the human capital Gini index; it remains
high, positive, and statistically significant at the 1 percent level.
In column 3 I include infant mortality in the set of controls, on the

grounds that the effect of human capital inequality on life expectancy
is not picking up the high correlation between the human capital Gini
coefficient and infant mortality rates. According to the results, when I
control for infant mortality rates, the estimated coefficient of the Gini
index drops substantially, but it remains negative and statistically sig-
nificant at the standard levels, which suggests that the initial distribution
of education affects infant mortality rates as well as life expectancy at
older ages.
Improvements to public health infrastructure, such as improved san-
itation and treated water, are also important factors that have contrib-
uted to the increases in life expectancy in developing countries during
the postwar period (e.g., Soares 2006). In order to assess the possibility
of the human capital Gini index capturing the effect of poor infrastruc-
ture, I control for the number of hospital beds per 1,000 inhabitants.
Because of data limitations, I am forced to use this measure as a proxy
for health infrastructure since treated water is available only from 1990
and the dependent variable is measured back to 1980. The greatest
shortcoming of this variable is that interpreting an increment in beds
as an improvement in infrastructure could lead to misleading conclu-
sions. As pointed out by Soares, hospital beds have decreased over the
years in most regions in the world, mainly in developed societies, where
recovering from surgery and diseases, for which hospitalization rather
than treatment was the solution, takes less time. Moreover, in developed
societies, technological change in health care has favored outpatient
over inpatient care. Thus, it is not clear that a greater number of hospital
beds will have a beneficial effect on life expectancy. Taking into account
these reservations, in column 4, I include the number of hospital beds
per 1,000 people in the set of controls. The results show that its inclusion
does not affect the influence of human capital inequality on life ex-
pectancy. In fact, the estimated coefficient of the Gini index is even
higher.
Chaudhury et al. (2006) pointed out that the quality of health delivery
is very low in developing countries, particularly in rural areas where
absenteeism among medical practitioners is very high. Moreover, access
to hospitals is easier in cities than in rural areas. To control for such
differences, in column 5, I include the percentage of the population
living in urban areas in 1960 as an additional explanatory variable. As
anticipated, the results show that countries with a greater percentage
of population living in urban areas in 1960 had, on average, higher life
expectancy during subsequent years. However, once again, including
this variable does not affect the negative association between human
capital inequality and life expectancy.
Finally, I control for political instability, which may result in armed
conflicts and reduce life expectancy. The measure of political instability
is an equally weighted average between the number of assassinations
per million inhabitants per year and the number of revolutions per year.
Column 6 shows that greater political instability has a negative influence
on life expectancy; the estimated coefficient is negative and statistically
significant. However, the influence of human capital inequality on sub-
sequent life expectancy remains unaffected.20
In short, consistent with the model’s implications, greater human
capital inequality has a negative impact on a country’s average life ex-
pectancy. This result holds even when controlling for a broad set of life
expectancy determinants suggested in the literature. The magnitude of
the effect of human capital inequality on life expectancy is also mean-
ingful. According to column 6, an increase by one standard deviation
in the human capital Gini index (0.284) is associated with a decrease
in subsequent life expectancy of about 1.49 years. Given that in 1960
the difference between the human capital Gini coefficient in sub-
Saharan African and high-income OECD countries is almost two times
the standard deviation, the quantitative effect implies that had sub-
Saharan African countries reduced the level of human capital inequality
to that of the high-income OECD countries, life expectancy in the Af-
rican region could have been 2.95 years higher.
C. Human Capital Investment Equation

All the explanatory variables have been measured with a sufficient num-
ber of lags to minimize any simultaneous bias and guarantee that
E[mi,tni,t⫺k] p 0 and E[mi,tei,t⫺k] p 0, in which case OLS applied to each
equation is an efficient and consistent estimator. However, if lagged
values of fertility and life expectancy are still endogenous variables in
the human capital accumulation equation, the OLS estimator is incon-
sistent. We can test for the endogeneity of fertility and life expectancy
by comparing the IV and OLS estimates with a Hausman test. The
analysis of whether the determinants of fertility and life expectancy are
good instruments to estimate equation (4) is displayed in table 3. In
view of the previous results, I use urbanization in 1960 and the share
of people who profess the Muslim religion as instruments for fertility.
The result, displayed in column 1, shows that these variables are good
instruments for fertility; they have strong explanatory power (F-statistic
20
I have also checked the robustness of the results to fixed variables that may proxy
for specific characteristics of every country that, if omitted, may bias the estimated coef-
ficients. On the one hand, I control for ethnic fractionalization since greater heterogeneity
may give rise to internal conflicts that may result in armed conflicts. On the other hand,
the diffusion of new health technologies can also improve average life expectancy in a
country (e.g., Soares 2006). A fixed variable that may pick up this effect is a dummy for
landlocked countries since countries with difficult access to trade may not benefit from
the health technologies produced in developed areas. Sachs and Warner (1997) find that
being landlocked or located in tropical areas is a geographical disadvantage for devel-
opment. However, even when I control for these variables, the negative impact of the
human capital Gini coefficient on life expectancy holds (the estimated coefficient of the
Gini index is ⫺7.121 with a standard deviation [SD] of 2.780).
1 10) and are uncorrelated with the error term (Sargan p-value p 0.11).
Column 2 shows that infant mortality, hospital beds, and political in-
stability are also good candidates to instrument life expectancy: the F-
statistic in the first stage is 46.92 and the Sargan p-value is 0.21. The
literature on financial development and growth has used variables on
legal origin and latitude as instruments for financial development (e.g.,
Levine et al. 2000; Beck, Demirgüc-Kunt, and Levine 2003). However,
column 3 shows that the legal origin variables and their interaction with
the Gini coefficient are weak instruments for financial development and
its interaction with inequality;21 the Shea partial R 2 is low and the F-
statistic is well below 10. Finally, I test the exclusion restriction by adding
all instruments as controls (col. 4). With the exception of the interaction
between the legal origin and the Gini coefficient, results show that none
of the variables used as instruments have a statistically significant effect
on the human capital investment rate apart from the effect transmitted
by the channel. Thus, the results so far indicate that we can use urban-
ization and Muslims as instruments for fertility and infant mortality,
hospital beds, and political instability as instruments for life expectancy.
However, the legal origin variables and latitude are weak instruments
for financial development and its interaction with inequality.
Equation (4) contains the join specification of the channels through
which human capital inequality may influence the accumulation of hu-
man capital. I use the proposed instruments to test whether fertility and
life expectancy should be treated as endogenous variables. Results of
the comparison between OLS and IV are displayed in columns 5 and
6. A Hausman test of the null hypothesis that OLS is consistent cannot
be rejected with a p-value equal to 0.255, suggesting that lagged values
of fertility and life expectancy can be treated as exogenous variables.
The theoretical predictions that state a negative effect from human
capital inequality on growth through the demographic mechanism pre-
dict causality running from inequality to fertility and life expectancy
and from demographic variables to human capital investment and
growth (e.g., De la Croix and Doepke 2003; Moav 2005; Castelló-Climent
and Doménech 2008). However, recent developments in this literature
indicate that these variables evolve together, and therefore, the rela-
tionship is associative instead of causal (e.g., Ehrlich and Kim 2005,
2007). The results in table 4 suggest that fertility and life expectancy
can be treated as exogenous variables. The reason for the consistency
of OLS could be that even though the current stock of human capital
may affect current rates of fertility and life expectancy, it is less likely
that actual enrollment rates in secondary education may influence the
fertility and life expectancy determined about 20 and 40 years back.
Therefore, results should not be seen as evidence against or in favor of
21
I include the German origin because it is the only legal origin variable that is statis-
tically significant in the first-stage equation.
TABLE 3
Dependent Variable: Average Human Capital Investment Rates, 1980–2000
IV IV IV Excl. OLS IV
(1) (2) (3) (4) (5) (6)
FERT60–80 ⫺.091* ⫺.044* ⫺.063* ⫺.095*
(.035) (.017) (.016) (.035)
LE60–80 .008 .015** .007*** .001
(.005) (.007) (.004) (.005)
FD60–80 ⫺.154 ⫺.177 ⫺.223** ⫺.319**
(.326) (.113) (.096) (.127)
FD60–80 # Ginih60 2.098 .335 .451*** .676**
(1.471) (.267) (.245) (.264)
418
Ginih60 ⫺.045 ⫺.299** ⫺.913** ⫺.192 ⫺.150 ⫺.176
(.202) (.139) (.360) (.148) (.145) (.214)
ln y60 .080* .069** .025 .024 .059* .068*
(.024) (.029) (.046) (.028) (.022) (.023)
Educ60 ⫺.021 .008 .038 ⫺.016 ⫺.005 ⫺.011
(.024) (.022) (.038) (.023) (.019) (.018)
PSE60–80 3.663* 2.379*** 1.375 2.893*** 3.197** 3.729*
(1.386) (1.355) (1.888) (1.448) (1.385) (1.413)
LaAm ⫺.085 ⫺.167* ⫺.130** ⫺.112** ⫺.107* ⫺.091***
(.053) (.038) (.061) (.046) (.040) (.048)
SAfrica ⫺.169* ⫺.164* ⫺.115 ⫺.065 ⫺.127** ⫺.147**
(.052) (.062) (.103) (.068) (.058) (.060)
Asiae .019 .017 ⫺.096 .005 ⫺.004 ⫺.012
(.068) (.066) (.116) (.070) (.071) (.067)
Constant .370*** ⫺.261 .672 ⫺.457 .067 .466
(.212) (.342) (.436) (.543) (.333) (.350)
First Stage
FERT LE FD FD#Ginih
Urbanization60 ⫺.019* .001
(.007) (.001)
Muslims .016* .000
(.004) (.001)
Infant mortality60 ⫺.136* .002
(.012) (.001)
Hospital beds60 ⫺.274*** .008
(.154) (.009)
Political instability60–80 ⫺3.872 .111
(2.2776) (.139)
German origin .435* .025 ⫺.108
(.160) (.081) (.074)
German origin # Ginih60 ⫺.478 .152 .594*
419
(.448) (.228) (.206)
Latitude .121 ⫺.025 .082
(.160) (.081) (.125)
R2 .863 .852 .713 .898 .881 .874
Countries 83 83 83 83 83 83
First stage:
Shea part R 2 .252 .662 .176 .048 .253/.573
F-statistic 12.29 46.92 5.05 1.19 5.27/23.31
Sargan p-value .114 .212 .11 .647
Hausman p-value .255
Note.—Robust standard errors are in parentheses.
TABLE 4
Structural Form
Reduced Ginih FERT FERT LE LE Demog. FD
OLS 3SLS SUR OLS OLS OLS OLS OLS OLS OLS
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10)
Ginih60 ⫺.421** ⫺.145 ⫺.163 ⫺.461* ⫺.156 ⫺.203*** ⫺.036 ⫺.557*
(.173) (.158) (.130) (.087) (.119) (.121) (.133) (.120)
FERT60–80 ⫺.101* ⫺.066* ⫺.083* ⫺.067* ⫺.055*
(.031) (.015) (.009) (.016) (.015)
LE60–80 .002 .006*** .017* .012* .008**
(.005) (.004) (.003) (.004) (.003)
FD60–80 ⫺.080 ⫺.275*** ⫺.219*** ⫺.062
(.111) (.154) (.133) (.108)
420
FD60–80 # Ginih60 .440 .596*** .445 .427
(.308) (.320) (.286) (.319)
ln y60 .042 .061a .058* .092* .087* .083* .049*** .055** .060* .080*
(.033) (.021) (.020) (.029) (.025) (.025) (.029) (.027) (.022) (.028)
Educ60 ⫺.014 ⫺.012 ⫺.006 .010 ⫺.008 ⫺.013 .018 .006 ⫺.011 .016
(.026) (.026) (.025) (.025) (.023) (.022) (.024) (.022) (.021) (.023)
PSE60–80 2.466*** 3.573* 3.210* 2.610*** 3.987* 3.381** 2.614*** 2.244 3.001** 2.410
(1.470) (1.136) (1.047) (1.537) (1.170) (1.352) (1.361) (1.404) (1.342) (1.568)
LaAm ⫺.197* ⫺.109** ⫺.111* ⫺.191* ⫺.083** ⫺.113* ⫺.124* ⫺.153* ⫺.101** ⫺.182*
(.044) (.043) (.036) (.040) (.037) (.038) (.040) (.040) (.039) (.039)
SAfrica ⫺.195* ⫺.136* ⫺.120* ⫺.226* ⫺.182* ⫺.184* ⫺.097*** ⫺.127** ⫺.125** ⫺.207*
(.059) (.049) (.045) (.054) (.050) (.049) (.054) (.057) (.057) (.057)
Asiae ⫺.013 ⫺.004 .001 .024 .023 .020 .015 .014 .014 .000
(.073) (.053) (.052) (.071) (.072) (.068) (.075) (.071) (.071) (.069)
Constant .365 .515 .130 .105 .225 .299 ⫺.857* ⫺.475 ⫺.123 .217
(.241) (.365) (.279) (.260) (.215) (.218) (.210) (.325) (.317) (.254)
Dependent Variable
FERT LE FERT LE
h
Gini 60 3.565* ⫺8.535* 3.553* ⫺8.481*
(.577) (2.669) (.577) (2.668)
Urbanization60 .002* ⫺.022* ⫺.022
(.001) (.006) (.006)
Muslims ⫺.001 .008* .009*
(.001) (.004) (.004)
Infant mortality60 .000 ⫺.157* ⫺.157*
(.001) (.015) (.015)
Hospital beds60 .008 ⫺.048 ⫺.053
(.010) (.180) (.180)
Political instability60–80 .110 .539 .588
(.138) (3.867) (3.873)
R2 .861 .870 .881 .832 .863 .868 .848 .855 .879 .838
421
Countries 83 83 83 83 83 83 83 83 83 83 83 83
Channels test:
a4 # b3 ⫺.360 ⫺.234
a5 # b3 ⫺.017 ⫺.051
Implied g6 ⫺.522 ⫺.448
Wald test p-value .470 .808
the models that predict a causal effect from inequality and demographic
variables to investment and growth versus those that state an associative
relationship. Nevertheless, by comparing OLS and IV, we can assess the
possible direction of the bias in the OLS estimates. It is worth noting
that using IV increases the coefficient of fertility, suggesting that OLS
results, if any, are not biased upward because of reverse causation. How-
ever, the coefficient of life expectancy reduces with IVs, indicating a
possible causality running from human capital investment rates to life
expectancy.
Overall, the results in the second stage show that the signs of the
coefficients of each channel are as expected. On the one hand, in line
with the fertility channel, the estimates provide statistically significant
evidence that higher fertility rates lead to lower investment in human
capital. In quantitative terms, a one-standard-deviation increase in total
fertility rates (1.83) reduces the investment in human capital by between
0.12 and 0.17 points. On the other hand, consistent with the life ex-
pectancy mechanism, results show that higher life expectancy has an
encouraging effect on human capital investment. In particular, a one-
standard-deviation increase in life expectancy (11.14) is associated with
an increment in human capital investment rates of between 0.01 and
0.08 points. Finally, as predicted by the credit market imperfection ap-
proach, a6 is negative and a8 is positive, suggesting that the negative
effect of human capital inequality on investment in human capital is
lower the greater the degree of financial development.
D. Measuring the Impact of Each Channel

The evidence so far suggests that the fertility, life expectancy, and credit
market imperfection channels are plausible explanations for the neg-
ative influence of human capital inequality on the accumulation rates
of human capital. Next I test this hypothesis more formally. Column 1
in table 4 reports the estimates of the reduced form of the model spec-
ified in equation (7). The results show an estimate of the Gini coefficient
equal to ⫺0.421. If the sum of the structural estimates derived from the
effect of the channels is close to this number, the described channels
are good candidates explaining the negative effect of human capital
inequality on human capital investment rates. That is, if the impact of
each channel and the specification is correct, once the determinants of
fertility and life expectancy are substituted into equation (4), we should
expect the coefficient of the Gini index to be close to g6 p a 4 #
b3 ⫹ a 5 # r 3 ⫹ a 6. The results for the structural form estimating a sys-
tem of simultaneous equations with 3SLS and SUR are displayed in
columns 2 and 3, respectively. The results are quite similar with both
estimators. However, as reported above, using IVs increases the esti-
mated coefficient of fertility and reduces that of life expectancy. The
implied g6 with the 3SLS estimators is ⫺0.522 and that with the SUR
technique is ⫺0.448, which is almost equal to the reduced-form estimate.

A formal test can be conducted on the basis of the model specification.
A nonlinear Wald test for the null hypothesis that the implied g6 is equal
to ⫺0.421 clearly indicates that we fail to reject the null, with a p-value
equal to 0.470 in the 3SLS and 0.808 with the SUR estimates.
The product of the coefficient of the human capital Gini index in
the fertility and life expectancy equations multiplied by the coefficients
of these variables in the human capital accumulation equation indicates
whether and how human capital inequality influences the accumulation
of human capital. For instance, combining the point estimates leads to
the effect of inequality on human capital investment through the fertility
channel, â4 # bˆ 3 p ⫺0.066 # 3.553 p ⫺0.234, and through the life
expectancy mechanism, â5 # rˆ 3 p 0.006 # ⫺8.481 p ⫺0.051.22 More-
over, as predicted by the credit market imperfection approach, â6 is
negative and â8 is positive, suggesting that the negative effect of human
capital inequality on investment in human capital is lower the greater
the degree of financial development.
Furthermore, I also estimate the individual effect of each channel
without controlling for the other competing mechanisms. This exercise
cannot be taken on face value and is performed only for illustrative
purposes since all the mechanisms at work must be controlled for to
assess the relevance of each channel. Column 4 in table 4 includes only
the human capital Gini index so that we can assess the direct effect of
human capital inequality on investment rates in human capital. In quan-
titative terms, the result suggests that a standard deviation increase in
the human capital Gini index (0.284) reduces human capital accu-
mulation rates by 0.131 points. The magnitude of the effect is consid-
erable since the average accumulation rate in sub-Saharan Africa during
this period was 0.27. In order to test whether the negative effect of
human capital inequality on human capital accumulation is driven by
the fertility and life expectancy channels, we should expect the estimated
coefficient of the Gini index to decrease once the direct effect of fertility
or life expectancy is accounted for. Indeed, when the fertility rate (col.
6) and life expectancy rate (col. 8) enter individually as explanatory
variables, the estimated coefficient of the human capital Gini index is
almost halved.23 What is more, when both fertility and life expectancy
are controlled for, the coefficient of the Gini index is no longer sig-
nificant, suggesting that the influence of human capital inequality on
the accumulation of human capital is mainly explained by demographic
22
I use the SUR estimates since the implied value of g6 with this estimator is almost
the same as that obtained in the reduced form.
23
If I use differential fertility between high- and low-educated women instead of total
fertility, the estimated coefficient of differential fertility in a sample of 50 countries is
⫺0.048 (SD 0.020). However, if I control for the Gini index or the total fertility rates, the
estimated coefficient of differential fertility is no longer significant. If I include the three
variables, only the coefficient of the total fertility rates is statistically significant.
mechanisms. Finally, column 10 reports the results for the credit market
imperfection approach. As predicted by this mechanism, the coefficient
of the Gini index is negative and that of the interaction between in-
equality and financial development is positive.
Overall, results suggest that the fertility channel explains a large part
of the negative effect of human capital inequality on investment rates
in human capital (⫺0.234). The life expectancy channel is also impor-
tant, although less relevant according to the size of its effect (⫺0.051).
Moreover, the degree of financial development also determines the way
human capital inequality influences human capital investment rates; the
negative effect is lower in countries with more developed financial sys-
tems. The negative effect of the Gini index disappears for values of FD
greater than 0.37. Table A1 shows that most of the countries in the
sample have average values of private credit below this threshold level.
V. Sensitivity Analysis
This section explores whether previous results are sensitive to the var-
iables used as instruments, the measure of inequality, the definition of
financial development, the measure of human capital investment, the
level of development of the countries included in the sample, and the
presence of atypical observations.
Alternative instrumental variables.—I test whether the results are sen-
sitive to the use of alternative instruments for fertility and life expec-
tancy. Acemoglu and Johnson (2007) compute a measure of predicted
mortality based on the 15 most infectious diseases in 1940 until there
is a global intervention. When a global health intervention takes place
(e.g., global use of penicillin and streptomycin to cure tuberculosis or
the use of DDT to eradicate malaria), the mortality rate for that disease
declines to the frontier mortality rate. The fact that all countries reduce
their mortality rate in a particular disease at the same time and that it
is not affected by how fast a country adopts the international technology
makes the exclusion restriction plausible. Acemoglu and Johnson use
this variable as an instrument for life expectancy to assess its causal
effect on per capita income. I use predicted mortality to check the
robustness of the results for the effect of life expectancy on human
capital investment rates.
Starting with the pioneer work by Becker (1973, 1974), it has been
shown that the proportion of men per woman affects the marriage
market. A higher men per woman ratio increases the availability of
potential mates for women and may also increase women’s bargaining
power in the marriage market. A causal effect from a greater sex ratio
to a higher marriage rate for women is documented in Angrist (2002)
and Abramitzky, Delavande, and Vasconcelos (2011). Given that the
number of married women is likely to influence fertility rates, I use the
ratio of male to female population aged 15–49 as an instrument for

them.24
The results with the alternative instruments are displayed in table 5.
One of the disadvantages of using predicted mortality as an instrument
for life expectancy is that the sample reduces to 45 countries and there
are no data for African countries, where the life expectancy channel is
more likely to operate. Column 1 checks for the appropriateness of the
population sex ratio as an instrument for the fertility rates in the whole
sample of 83 countries. The coefficient of the sex ratio is positive and
statistically significant at the 1 percent level with a first-stage F-statistic
equal to 13.14. Interestingly, the estimated coefficient of fertility is sim-
ilar to that obtained in column 1 of table 3 using urbanization and the
share of Muslims as instruments. However, when I repeat the exercise
for the sample of 45 countries, the first-stage F-statistic drops substan-
tially, indicating that the instrument may be weak in this specific group
of economies. The measure of predicted mortality is also significantly
related to life expectancy. However, the F-statistic in the first stage also
suggests a possible weak instrument problem (col. 3).25 The test for the
exclusion restriction in column 4 shows that both instruments are valid;
none of the instruments have a significant effect on the human capital
investment rates apart from that through the corresponding channel.
In line with the previous results, the comparison of the OLS and IV
estimates (cols. 6 and 7) with a Hausman test indicates that fertility and
life expectancy can be treated as exogenous variables or that endoge-
neity does not affect the OLS estimates and, therefore, are consistent.
Also corroborating previous findings, the estimation of the structural
equations shows that higher human capital inequality in 1960 is signif-
icantly related to lower life expectancy and higher fertility rates (see
the first stage in cols. 8 and 9). The results in the second stage show
that higher fertility rates also have a negative effect on the accumulation
rates of human capital, with an estimated coefficient that ranges from
⫺0.082 to ⫺0.145. However, when all the channels are accounted for,
the effect of life expectancy on human capital investment rates is poorly
estimated. It is worth noting that this result is not due to the use of
predicted mortality as an instrument since OLS provides similar esti-
mates, as displayed in column 6. Instead, a plausible explanation could
be the small number of observations and the omission of African coun-
tries from the sample.
24
Becker, Cinnirella, and Woessmann (2010) also use data on population sex ratios to
study the causal effect from fertility to education on 334 Prussian counties in 1849.
25
The explanatory power of predicted mortality rises and the first-stage F-statistic is
above 10 when the initial level of per capita income, the level of education, and public
spending on education are excluded from the set of controls. In that estimation the
coefficient of the Gini index is ⫺26.848 (SD 2.987), that of predicted mortality is ⫺7.556
(SD 2.417), and the F-statistic in the first stage is 10.29. The second stage reports a
coefficient for life expectancy equal to 0.041 (SD 0.015).
TABLE 5
Structural Form
Excl. Red.
IV IV IV OLS OLS OLS IV 3SLS SUR
(1) (2) (3) (4) (5) (6) (7) (8) (9)
Ginih60 ⫺.042 ⫺.062 ⫺.100 ⫺.957* ⫺.836* ⫺.956* ⫺.225 ⫺.113 ⫺.914*
(.157) (.258) (.472) (.332) (.215) (.312) (1.257) (.890) (.279)
FERT60–80 ⫺.092* ⫺.166* ⫺.082* ⫺.084* ⫺.169 ⫺.145 ⫺.082*
(.029) (.060) (.029) (.028) (.134) (.126) (.023)
LE60–80 .022 ⫺.013 ⫺.011 ⫺.001 .003 ⫺.009
(.021) (.009) (.008) (.024) (.020) (.007)
FD60–80 ⫺.429* ⫺.406** ⫺.436* ⫺.271 ⫺.307 ⫺.435*
(.150) (.157) (.147) (.290) (.258) (.151)
FD60–80 #
426
Ginih60 1.515** 1.266** 1.558** .645 .792 1.560*
(.612) (.562) (.571) (1.601) (1.198) (.482)
ln y60 .080* ⫺.046 .042 .037 .079 .043 ⫺.038 .000 .043
(.021) (.071) (.094) (.056) (.066) (.051) (.136) (.110) (.042)
Educ60 ⫺.021 .007 ⫺.006 ⫺.004 ⫺.006 ⫺.001 .004 .001 ⫺.002
(.023) (.023) (.022) (.025) (.026) (.024) (.024) (.028) (.023)
PSE60–80 3.668* 2.999*** .915 3.115*** 2.646 3.266** 3.920*** 3.509*** 3.196**
(1.096) (1.758) (1.464) (1.517) (1.690) (1.413) (2.313) (2.118) (1.393)
LaAm ⫺.084*** .036 ⫺.168* ⫺.131** ⫺.230* ⫺.127** .025 ⫺.058 ⫺.127**
(.049) (.084) (.059) (.048) (.049) (.046) (.233) (.201) (.051)
SAfrica ⫺.169*
(.056)
Asiae .019 .057 .060 ⫺.017 ⫺.013 ⫺.001 .045 .029 ⫺.003
(.067) (.075) (.077) (.070) (.075) (.065) (.088) (.082) (.055)
Constant .371** 1.695** ⫺.967 2.022c .947 1.717*** 1.771 1.072 1.576**
(.169) (.684) (.995) (1.064) (.985) (.911) (1.621) (1.768) (.623)
First Stage First Stage
FERT FERT LE FERT LE FERT LE

h
Gini60 3.564* 2.740* ⫺20.889* 6.025* ⫺27.026* 6.026* ⫺26.949*
(.578) (.897) (4.281) (.663) (2.674) (.663) (2.672)
Pop sex
ratio60 2.813* 5.874** ⫺.114 ⫺.528 5.923*** 5.910***
(.776) (2.661) (.419) (.498) (3.164) (3.163)
Pred
mortality40 ⫺5.523*** ⫺.078 ⫺.061 ⫺5.822* ⫺5.911*
(2.725) (.098) (.105) (1.926) (1.924)
R2 .863 .864 .849 .908 .882 .906 .861
Countries 83 45 45 44 44 44 44 44 44 44 44
1st-stage Shea
part R 2 .151 .116 .099 .045/.149
1st stage
427
F-statistic 13.14 4.87 4.11 .71/2.60
Hausman
p-value .670
Implied g6 ⫺1.068 ⫺1.165
Wald test p-value .482 .078
TABLE 6
Ineq. FERT FERT LE LE Dem. FD
OLS OLS OLS OLS OLS OLS OLS
(1) (2) (3) (4) (5) (6) (7)
Ginih60 ⫺.581* ⫺.284 ⫺.319 ⫺.243 ⫺.932*
(.189) (.187) (.280) (.255) (.217)
FERT60–80 ⫺.116* ⫺.095* ⫺.088*
(.023) (.027) (.029)
LE60–80 .018* .012 .003
(.004) (.008) (.008)
FD60–80 ⫺.416**
(.155)
FD60–80 #
Ginih60 1.436*
(.501)
ln y60 .119*** .041 .025 .090*** .077 .021 .093
(.061) (.051) (.047) (.049) (.051) (.045) (.059)
Educ60 ⫺.012 .003 ⫺.001 ⫺.006 ⫺.009 ⫺.001 ⫺.009
(.029) (.025) (.024) (.025) (.024) (.024) (.024)
PSE60–80 .833 3.204** 2.073 1.661 .877 1.995 2.095
(1.877) (1.473) (1.467) (1.470) (1.625) (1.551) (1.708)
LaAm ⫺.216* ⫺.043 ⫺.071 ⫺.181* ⫺.190* ⫺.076 ⫺.234*
(.058) (.043) (.044) (.048) (.048) (.046) (.048)
SAfrica
Asiae .058 .060 .057 .062 .059 .058 .003

(.088) (.077) (.072) (.084) (.083) (.073) (.074)
Constant .012 .749 .975** ⫺1.167* ⫺.522 .780 .310
(.536) (.476) (.432) (.274) (.715) (.821) (.548)
R2 .844 .880 .889 .851 .862 .890 .877
Countries 45 45 45 45 45 45 44
Table 6 analyzes the channels individually in the reduced sample of

45 economies. Column 1 indicates that the negative influence of the
human capital Gini coefficient can be explained by the fertility, life
expectancy, and credit market imperfection channels. Columns 2–6
show that the estimated coefficient of the Gini index reduces and stops
being statistically significant once fertility and life expectancy are ac-
counted for.26 Moreover, the negative effect of greater human capital
inequality is lower the greater the degree of financial development (col.
7).
Alternative measures of human capital inequality.—It has been common
in the empirical literature of inequality and growth to use the Gini
coefficient as a measure of inequality. In spite of having good properties,
the Gini coefficient is an aggregate measure of inequality and does not
26
It is worth noting that, unlike the results in table 3, when the channels are analyzed
individually, IV provides a slightly higher coefficient for life expectancy than its OLS
counterpart (see col. 3 of table 5 and col. 4 of table 6).
give any information on the shape of the distribution. As the relevant

aspect of human capital distribution may be different in each channel,
table 7 checks the sensitivity of the findings using alternative measures
of inequality that capture the share of education at the lower, middle,
and upper parts of the distribution. In each column, the explanatory
variables are the same as those in table 4; to save space only the coef-
ficients of interest are included in the table.
Overall, the results with the quintiles are similar to those found with
the Gini coefficient. When equality is gauged by the share of education
in the first quintile of the distribution of education, a comparison be-
tween the reduced and structural estimates shows that the coefficient
of the first quintile in the reduced form of the model (2.212) is very
similar to that implied by the structural form (g63SLS p 2.353 and
g6SUR p 2.232). A nonlinear Wald test for the equality of the coefficients
cannot reject the null with p-values equal to 0.822 and 0.979, respectively.
The positive influence of greater equality on human capital investment
rates is mainly explained by the fertility and credit market imperfection
mechanisms and to a lesser extent by the life expectancy channel. Col-
umns 4 and 7 show that a greater share of education attained by the
lowest quintile has a positive but insignificant effect on subsequent life
expectancy. Accordingly, columns 8–12 indicate that while the positive
influence of greater equality of education on human capital investment
rates drops markedly once fertility is controlled for, the coefficient of
the first quintile decreases but remains significant if life expectancy is
included in the set of controls. The results also suggest that the increase
in the accumulation of human capital of an increment in the degree
of financial development is higher the greater the degree of inequality,
that is, the lower the share of education attained by the least educated
20 percent of individuals.
When equality is measured with the share of education attained by
the majority of the population—cumulative third quintile in the distri-
bution of education—results are consistent with the predictions of the
fertility, life expectancy, and credit market imperfection mechanisms.
Panel B of the table shows that the predicted coefficient of the third
quintile in the distribution of education as a result of estimating the
reduced form of the model (0.632) is close to that obtained in the
estimation of the structural form (gˆ 3SLS6 p 0.677 and gˆ SUR
6 p 0.596).
While most of the effect is explained by the demographic channels (cols.
8–13), the evidence reported in column 14 suggests that the credit
market imperfection approach may reinforce this effect; the signs of
the coefficients are as expected, and the coefficient of FD is statistically
significant at the standard levels. A Wald test for the null hypothesis
that g6 p 0.632 cannot reject the null with Wald p-values equal to 0.800
and 0.828, indicating the accuracy of the estimates and the evidence
supporting the mechanisms at work.
Panel C of the table suggests that a greater concentration of education
TABLE 7
Robustness: Alternative Measures of Human Capital Inequality
Dependent Variable
Structural Form
Ḣ Ḣ Ḣ Ḣ Ḣ Ḣ Ḣ Ḣ
Reduced Ḣ FERT LE Ḣ FERT LE Ineq. FERT FERT LE LE Demog. FD
OLS 3SLS 3SLS 3SLS SUR SUR SUR OLS OLS OLS OLS OLS OLS OLS
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14)
A. Inequality Variable: First Quintile in the Distribution of Education
1st quinth60 2.212* 1.544*** ⫺14.685* 2.566 1.521** ⫺14.700* 2.444 1.667* .381 1.105* .545 3.554*
(.689) (.818) (2.279) (13.019) (.637) (2.280) (13.012) (.343) (.355) (.299) (.337) (.569)
FERT60–80 ⫺.054 ⫺.047* ⫺.083* ⫺.076* ⫺.046*
(.034) (.015) (.009) (.013) (.014)
LE60–80 .006 .008* .017* .015* .009*
(.005) (.003) (.003) (.003) (.003)
430
FD60–80 .282** .154 .127 .488*
(.140) (.138) (.125) (.162)
h
FD#1Q ⫺2.925** ⫺2.410*** ⫺2.198*** ⫺4.769*
(1.131) (1.253) (1.198) (1.330)
R2 .860 .883 .731 .888 .884 .731 .888 .8 .86 .86 .85 .87 .88 .83
Implied g6 2.353 2.232
Wald p-value .822 .979
B. Inequality Variable: Third Quintile in the Distribution of Education
3rd quinth60 .632* .214 ⫺4.595* 9.729* .245 ⫺4.578* 9.684* .579* .182 .266** .061 .792*
(.187) (.210) (.712) (3.271) (.177) (.712) (3.271) (.097) (.141) (.133) (.157) (.161)
FERT60–80 ⫺.097* ⫺.064* ⫺.083* ⫺.069* ⫺.054*
(.028) (.015) (.009) (.016) (.015)
LE60–80 .002 .006*** .017* .013* .008**
(.005) (.003) (.003) (.004) (.003)
FD60–80 .361*** .211 .156 .403***
(.196) (.168) (.157) (.217)
h
FD#3Q ⫺.766 ⫺.791*** ⫺.621 ⫺.824***
(.470) (.425) (.395) (.494)
R2 .866 .870 .735 .898 .881 .735 .898 .83 .86 .87 .85 .86 .88 .84
Implied g6 .677 .596
C. Inequality Variable: Top Quintile in the Distribution of Education
5th quinth60 ⫺.243*** ⫺.094 2.625* ⫺6.947* ⫺.082 2.608* ⫺6.905* ⫺.384* ⫺.101 ⫺.087 .023 ⫺.374*
(.139) (.120) (.620) (2.354) (.110) (.620) (2.354) (.094) (.101) (.101) (.102) (.128)
FERT60–80 ⫺.102* ⫺.072* ⫺.083* ⫺.074* ⫺.058*
(.028) (.015) (.009) (.013) (.013)
LE60–80 .004 .008** .017** .015* .009*
(.005) (.003) (.003) (.004) (.003)
FD60–80 ⫺.049 ⫺.377*** ⫺.302*** .085
(.165) (.206) (.170) (.158)
FD#5Qh .258 .706*** .537 .015
(.364) (.399) (.336) (.341)
R2 .852 .872 .674 .898 .881 .674 .898 .81 .86 .87 .85 .85 .88 .82
Implied g6 ⫺.390 ⫺.325
D. Inequality Variable: Bottom/Top Quintile in the Distribution of Education
1st quint/5th quint .644* .452*** ⫺4.250* .421 .447** ⫺4.255** .392 .488* .122 .325* .166*** 1.053*
431
(.213) (.235) (.694) (3.825) (.191) (.694) (3.823) (.105) (.099) (.089) (.095) (.185)
FERT60–80 ⫺.056* ⫺.048* ⫺.083* ⫺.076** ⫺.046*
(.032) (.015) (.009) (.012) (.014)
LE60–80 .006 .008* .017* .015* .009**
(.004) (.003) (.003) (.003) (.003)
FD60–80 .272*** .146 .122 .488*
(.138) (.136) (.123) (.157)
h
FD#1Q/5Q ⫺.841** ⫺.710*** ⫺.651*** ⫺1.427*
(.354) (.382) (.367) (.417)
R2 .860 .883 .723 .888 .884 .723 .888 .8 .86 .87 .85 .87 .88 .83
Implied g6 .693 .654
Countries 83 83 83 83 83 83 83 83 83 83 83 83 83 83

in the top quintile has a negative influence on the human capital in-
vestment rates as well. The negative effect of inequality at the top end
of the distribution can also be explained by the fertility, life expectancy,
and credit market imperfection approaches. Nevertheless, the effect
predicted by the channels is higher than that derived from the reduced
form, as reflected by the implied g6 and the lower Wald test p-values.
In Ehrlich and Kim (2007) the association between economic growth
and inequality depends on several factors, such as the parameters that
trigger the economic takeoff, their impact on the fertility rates of dif-
ferent groups, and the measure of inequality. In particular, the measures
of inequality derived in the model include the ratio of relative income
between different groups, the product of relative income and group
size, and the Gini coefficient. I can use the quintile measures to test
whether the results change when I proxy inequality by the relative earn-
ing capacity of agents in two different groups. Since the earning capacity
in each group is determined in the model by endowments and previous
investment in education, I can proxy the family-education relative in-
equality measure by an interquintile ratio. Panel D of table 7 shows the
results of measuring inequality with the ratio between the bottom and
top quintiles in the distribution of education.27 The findings reveal that
previous results hold and are similar to those with the first quintile; the
fertility, credit market imperfection, and, albeit to a lesser extent, life
expectancy channels explain most of the effect of human capital in-
equality on human capital investment rates. The structural estimates are
very close to those in the reduced form of the model, and a Wald test
on the null that the coefficients are equal reports p-values greater than
0.8.
Alternative measures of financial development.—I have also checked the
robustness of the results to several measures of financial development
available for a similar number of countries and years, taken from Beck
et al. (2009). When I use the ratio of liquid liabilities to GDP, deposit
money bank assets as a share of GDP, bank deposits to GDP, financial
system deposits to GDP, and private credit by deposit money banks to
GDP, the results closely resemble those found above.
Different stages of development.—I have analyzed whether the channels
through which human capital inequality influences the accumulation
of human capital differ between rich and poor economies. The results
when the whole sample is split into high-income OECD economies and
the remaining countries are displayed in table 8.28 As predicted by the
demographic channels, other things being equal, greater human capital
27
I cannot compute the ratio between the top and bottom quintiles, which would be
closer to Ehrlich and Kim’s (2007) measure of inequality, since in many countries the
share of education attained by the bottom 20 percent of individuals with the lowest level
of education is zero.
28
The classification of countries according to their level of income is taken from the
World Bank in 2007.
inequality is significantly related to higher fertility rates and lower life

expectancy in the group of less developed economies. In fact, the es-
timated effect of human capital inequality on the demographic variables
together with the effect of fertility and life expectancy on human capital
investment rates (cols. 2–7) imply values of g6 (⫺0.436 and ⫺0.358)
that are slightly higher than that obtained in the reduced form
(⫺0.284). However, a Wald test for the null that coefficients are equal
fails to reject H0 with p-values equal to 0.376 and 0.635, respectively. To
reinforce this evidence, the remaining columns show that the demo-
graphic channels are important explanations of the negative effect of
human capital inequality on the accumulation rates of human capital
in poorer economies. On the one hand, lower fertility rates and greater
life expectancy are significantly related to human capital investment
rates. On the other hand, once life expectancy and fertility rates are
included in the set of controls, the estimated coefficient of the Gini
index drops markedly and is no longer statistically significant. However,
the empirical support for the credit market imperfection channel in
these economies is weak: none of the coefficients of financial devel-
opment and their interaction with the inequality indicator are statisti-
cally significant in any specification.
Results concerning the high-income OECD countries are somehow
different. Panel B of the table shows that there is no significant evidence
of a negative effect of human capital inequality on the investment rates
of human capital in the high-income OECD economies. This is also
reflected in the lack of evidence that human capital inequality influences
fertility rates or life expectancy in these economies. Moreover, although
it seems that lower fertility and greater life expectancy are related to
higher investment rates in human capital, the estimated coefficients are
not statistically significant. The same is true for the financial develop-
ment and interaction term; the signs of the coefficients are as expected,
but they are not statistically significant in almost any specification.
One of the problems with splitting the sample into poor and rich
economies is that the estimated parameters have to be identified in a
very small number of countries (e.g., the sample of high-income OECD
economies includes only 21 observations). In order to overcome this
shortcoming, I use the whole sample and allow the explanatory variables
to interact with a dummy variable for the high-income OECD countries.
When the dummy is equal to zero, we can identify the effect of inequality
on the human capital investment rates of those countries that are low-
or middle-income economies or that are high-income but do not belong
to the OECD (e.g., Barbados, Trinidad and Tobago, Bahrain, Israel,
Kuwait, Singapore, and Cyprus). The results for the variables of interest
are displayed in panel C of table 8. When the dummy HI OECD p 0, the
results are very similar to those found in the sample of less developed
economies; human capital inequality negatively influences the accu-
mulation of human capital, and this effect is mainly explained by the
TABLE 8
Robustness: Different Levels of Development
Dependent Variable
Structural Form
Ḣ Ḣ Ḣ Ḣ Ḣ Ḣ Ḣ Ḣ Ḣ
Reduced Ḣ FERT LE Ḣ FERT LE Ineq. FERT FERT LE LE Demog. FD FD
OLS 3SLS 3SLS 3SLS SUR SUR SUR OLS OLS OLS OLS OLS OLS OLS OLS
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14) (15)
A. Less Developed Economies
Ginih60 ⫺.284 ⫺.190 2.446* ⫺8.922* ⫺.176 2.426* ⫺8.795* ⫺.344* ⫺.168 ⫺.150 ⫺.052 ⫺.334** ⫺.734**
(.196) (.173) (.576) (3.027) (.161) (.577) (3.025) (.104) (.132) (.132) (.150) (.162) (.300)
FERT60–80 ⫺.097* ⫺.053* ⫺.069* ⫺.054* ⫺.046**
(.035) (.019) (.011) (.018) (.018)
LE60–80 .001 .006 .012* .009** .007***
(.005) (.004) (.003) (.004) (.004)
FD60–80 .253 ⫺.439 ⫺.371 .087 ⫺1.136*
434
(.544) (.464) (.417) (.462) (.386)
h
FD#Gini ⫺.403 .716 .535 ⫺.038 1.629**
(.721) (.683) (.601) (.632) (.712)
R2 .742 .728 .580 .839 .758 .581 .839 .705 .733 .743 .724 .731 .756 .705 .343
Implied g6 ⫺.436 ⫺.358
Wald
p-value .376 .635
Countries 62 62 62 62 62 62 62 62 62 62 62 62 62 62 62
B. High-Income OECD Economies
Ginih60 .191 .048 1.225 ⫺1.468 ⫺.379 1.252 ⫺2.152 ⫺.024 ⫺.025 .024 .002 ⫺.636 ⫺.684***
(.551) (.854) (.850) (4.627) (.580) (.850) (4.917) (.229) (.235) (.244) (.260) (.645) (.379)
FERT60–80 ⫺.051 ⫺.038 ⫺.017 ⫺.017 ⫺.010
(.109) (.032) (.023) (.024) (.029)
LE60–80 .039 .015*** .008 .008 .007
(.025) (.009) (.006) (.009) (.010)
FD60–80 ⫺.207 ⫺.332 ⫺.385** ⫺.375 ⫺.295***
(.219) (.212) (.191) (.258) (.144)
FD#Ginih .412 .590 .986 1.184 1.392***
(.917) (1.094) (.871) (1.200) (.733)
R2 .734 .216 .219 .610 .535 .218 .614 .373 .379 .379 .392 .393 .395 .498 .469
Implied g6 ⫺.071 ⫺.459
Wald
p-value .737 .265
Countries 21 21 21 21 21 21 21 21 21 21 21 21 21 21 21
C. Whole Sample
Ginih60 ⫺.302 ⫺.134 3.674* ⫺8.694* ⫺.159 3.676* ⫺8.656* ⫺.346* ⫺.168 ⫺.155 ⫺.054 ⫺.348** ⫺.725**
(.207) (.164) (.574) (2.651) (.146) (.575) (2.650) (.104) (.134) (.131) (.151) (.164) (.288)
FERT60–80 ⫺.086* ⫺.054* ⫺.069* ⫺.054* ⫺.046**
(.033) (.017) (.011) (.018) (.019)
LE60–80 .001 .006*** .012* .009** .007***
(.005) (.004) (.003) (.004) (.004)
FD60–80 .215 ⫺.364 ⫺.385 .058 ⫺1.134*
(.570) (.445) (.381) (.474) (.388)
h
FD#Gini ⫺.339 .569 .551 .009 1.633**
(.761) (.654) (.547) (.649) (.723)
Ginih#HIOECD 1.273* ⫺.057 4.409* 53.736* .124 4.403* 52.873* .406** .216 .274 .136 .244 ⫺.277
435
(.457) (1.045) (.396) (15.752) (.653) (.396) (15.768) (.162) (.194) (.167) (.189) (.419) (.365)
FERT#HIOECD ⫺.031 .036 .069** .049 .044
(.176) (.050) (.026) (.030) (.031)
LE#HIOECD .048 .007 .005 .004 .004
(.050) (.012) (.005) (.004) (.004)
FD#HIOECD ⫺.234 ⫺.114 .126 ⫺.297 .769***
(.583) (.593) (.452) (.508) (.410)
FD#Gini#
HIOECD ⫺.241 .363 ⫺.144 .501 .159
(.980) (1.667) (1.232) (1.069) (1.014)
2
R .888 .866 .72/.91 .89/.97 .892 .73/.91 .89/.98 .865 .877 .881 .873 .876 .887 .868 .371
Countries 83 83 83 83 83 83 83 83 83 83 83 83 83 83 83
fertility and life expectancy mechanisms. Also in line with the previous
findings, results show a lack of evidence of these mechanisms in the
sample of rich economies. In fact, when HI OECD p 1, the effect of the
Gini index is positive and even statistically significant in some specifi-
cations.
This result is not surprising since most of the theoretical models
referring to the negative influence of human capital inequality on in-
vestment and growth rates are more likely to operate in low-income
countries where differences in fertility and life expectancy among in-
dividuals with different levels of education are larger. However, what is
most striking is the lack of evidence of the credit market imperfection
approach in low-income economies.29 One possible explanation is that
in these economies credit market constraints operate at the primary
level; that is, financial restrictions become an entrance barrier to human
capital investment. To test for this possibility, I rerun the regression in
column 14 with the enrollment rates in primary education as the de-
pendent variable. The results, displayed in column 15, reveal that the
estimated coefficient of the Gini index is negative, that of the interaction
term is positive, and all are statistically significant at conventional levels.
Thus, consistent with the predictions of the credit market imperfection
approach, the influence of human capital inequality on human capital
investment rates depends on the degree of development of the financial
system. That is, the negative effect of human capital inequality on pri-
mary schooling investment rates is greater in those countries where it
is more difficult to access credit.30
Nevertheless, one source of measurement error in the previous re-
gressions is that the gross enrollment ratios used to proxy investment
rates may overstate the accumulation of human capital when students
repeat years, which is a major problem at the primary level. In fact,
gross enrollment ratios in primary schooling exceed one in many coun-
tries. In order to avoid findings with primary enrollment rates being
driven by a high rate of repeaters, I have checked the robustness of the
results with net primary enrollment rates available for the year 2000.
The results with net primary enrollment rates in a sample of 50 less
developed economies are also in line with the predictions of the credit
market imperfection approach; the estimated coefficients of the in-
equality indicator, FD, and the interaction term have the expected sign
and are statistically significant at conventional levels.31
Atypical observations.—One major concern in my small sample is
29
Measuring human capital inequality with the first or the third quintile in the distri-
bution of education, instead of the Gini coefficient, does not change the results to a great
extent.
30
I have also tried with enrollment rates in tertiary education but do not find any
significant evidence for the credit market imperfection approach at higher education
levels.
31
The estimated coefficients of the Gini index, FD, and Gini # FD are ⫺0.654 (SD
0.336), ⫺0.676 (SD .294), and 1.279 (SD 0.487), respectively.
whether the results are driven by a few influential observations. In order

to test the robustness of the results to the presence of outliers, I have
rerun the regressions in columns 2 and 3 in table 4, including dummy
variables for those countries where residuals are more than twice the
standard errors of the estimated residuals.32 The results hardly change,
suggesting that previous findings are not driven by atypical observations.
VI. Human Capital Inequality and Economic Growth
Previous sections have analyzed the structural form of the channels that
predict a negative impact of human capital inequality on human capital
investment rates. This section examines these mechanisms through the
direct effect of human capital inequality on per capita income growth
rates.
One of the main criticisms of cross-section regressions in growth mod-
els is that estimators may be biased because of variables being omitted
from the model. More specifically, these regressions fail to control for
tastes, the level of technology, resource endowments, climate, institu-
tions, or any other variable specific to every country, which may be
important determinants of growth rates and may be correlated with the
explanatory variables included in the estimated equation. Measuring
these variables can be troublesome because they are sometimes unob-
servable. However, if these variables are constant over time, we can
control for them by including a country-specific effect in the model. In
fact, empirical studies that estimate panel data models have challenged
the cross-sectional results of a negative effect of income inequality on
growth rates. For instance, in a panel of countries, Barro (2000) finds
little association between income inequality and economic growth for
a broad number of countries. Moreover, he finds a negative relationship
between both variables in poor countries and a positive association in
wealthier nations.33 However, the most surprising results were obtained
by Forbes (2000). This study controls for country-specific effects, and
the findings suggest that in the medium and short term an increase in
the level of inequality in the distribution of income in a country has a
32
Using this procedure, in col. 2 I identify the following countries as outliers: the Central
African Republic, Venezuela, Singapore, Papua New Guinea, Congo, South Africa, and
Bahrain in the human capital accumulation equation; Portugal in the fertility equation;
and Algeria, Egypt, Tunisia, Bahrain, Turkey, Congo, Senegal, and Zimbabwe in the life
expectancy equation. With the exception of the Central African Republic and Singapore,
which do not seem to be outliers in the human capital equation, the same countries are
identified as atypical observations in the corresponding equation of cols. 2 and 3.
33
Ehrlich and Kim (2007) show that the dynamic association between income growth
and inequality can exhibit several shapes depending on the type of shock that produces
the takeoff and the way they reach the fertility rates of different family groups.
positive and significant relationship with subsequent economic growth

rates.34
Therefore, as controlling for fixed effects seems to be an important
issue in the relationship between income inequality and growth, as
shown by Forbes (2000), in this section I control for unobservable het-
erogeneity by estimating a dynamic panel data model. Contrary to
Forbes’s study, this paper highlights the role of inequality in human
capital. More specifically, the framework in which the different channels
will be examined in a growth equation is as follows:
(ln yi,t ⫺ ln yi,t⫺t)/t p b ln yi,t⫺t ⫹ gInequalityi,t⫺t ⫹ X i,t⫺t d (8)

⫹ yt ⫹ ai ⫹ ␧it.
Reorganizing, we get
ln yi,t p b˜ ln yi,t⫺t ⫹ gInequality

˜ ˜ ˜
i,t⫺t ⫹ X i,t⫺td ⫹ yt ⫹ a
˜ i ⫹ ␧˜ i,t, (9)
where yit is real GDP per capita in country i measured at year t; t is a

5-year span; Inequalityi,t⫺t measures human capital inequality in country
i at the beginning of the period; b, g, and d represent the parameters
of interest that are estimated; yt is a time-specific effect; ai stands for
specific characteristics in every country that are constant over time; and
␧it collects the error term that varies across countries and across time.35
In order to reduce omitted variable bias, matrix X i,t⫺t includes k ex-
planatory variables, suggested in the literature as important determi-
nants of growth rates (e.g., Barro 2000). Empirical studies analyzing
growth usually estimate a broader version of the neoclassical growth
model that includes the convergence property as well as other variables
that determine the steady state. In this line, the model estimated in this
section will control for initial conditions and some variables, chosen by
the government or private agents, which characterize the steady state.
The variables that account for the initial conditions are the level of per
capita income (ln y) and the initial stock of human capital, proxied by
the average years of secondary education of the population aged 25
years and over (Educi,t⫺t). The determinants of the steady state include
some variables that answer for government policies and others that refer
to optimal decisions by private agents. These variables include the gov-
ernment share of real GDP (G/GDP); the number of revolutions per
year (Revol); total trade, measured as exports plus imports divided by
real GDP (Trade); and the inflation rate, measured as the annual growth
rate in consumer prices (Inflation).
34
Barro (2008) and Castelló-Climent (2010) find a negative relationship between in-
come inequality and economic growth in panel data models in a broad sample of countries
at various stages of development.
35
If we consider t different from one, we have that b˜ p tb ⫹ 1, g˜ p tg, d˜ p td, y˜ t p
tyt , a˜ i p tai, and ␧˜ i,t p t␧i,t .
Results with the system GMM estimator are displayed in table 9.36 In
the first place, I check whether more human capital accumulation in-
creases growth rates in per capita income, given that in the previous
sections I have mainly analyzed the effect of human capital inequality
on the human capital investment rate. As expected, the results displayed
in column 1 suggest that increased secondary school enrollment rates
raise per capita income growth rates; the estimated coefficient of human
capital investment is positive and also statistically significant. In quan-
titative terms, a one-standard-deviation increase in secondary school
enrollment rates (0.332) is associated with a 1.53-percentage-point in-
crease in growth. Moreover, the effect of the other explanatory variables
is also as expected. There is evidence of conditional convergence of per
capita income, with a negative relationship between initial per capita
income and economic growth. However, while an improvement in the
terms of trade has a beneficial effect on growth, government spending
has a negative effect. The measure of political instability, Revol, is neg-
atively related to economic growth, and the same is true for the inflation
rate.
Column 2 verifies the direct effect of human capital inequality on
growth without controlling for life expectancy and fertility rates. One
interesting result is that controlling for country-specific effects and in-
strumenting the explanatory variables does not substantially change the
results concerning the effect of human capital inequality on economic
growth; the coefficient of the human capital Gini index is negative and
statistically significant at the 1 percent level and considerable in quan-
titative terms, since an increase by one standard deviation in the human
capital Gini index (0.26) reduces the annual growth rate by 1.48 percent.
This result is important because the puzzling empirical evidence re-
garding income inequality (e.g., Forbes 2000) does not hold with human
capital inequality. Both cross-section and panel techniques show that
human capital inequality has a negative impact on per capita income
growth rates.
In the analysis of the channels, the test of the fertility approach shows
that while higher fertility rates are associated with lower growth rates
(col. 3), once fertility is accounted for, the negative effect on growth of
greater human capital inequality completely vanishes (col. 4). Likewise,
columns 5 and 6 show that while an improvement in life expectancy
favors growth, once life expectancy enters the set of controls, the effect
of the human capital inequality indicator decreases sharply and is no
longer statistically significant. Furthermore, when fertility, life expec-
36
In order to avoid overfitting the model, I use the variables lagged two periods as
instruments for the difference equations. The results are qualitatively similar if I use all
further lags instead. However, if more lags are used as instruments, the Hansen J-test shows
a value equal to one, suggesting that the model is overfitted. The instruments for the
equation in levels are the variables in differences lagged one period. The AR(2), Hansen,
and difference Hansen tests suggest that the set of instruments is valid.
TABLE 9
Dependent Variable: Per Capita Income Growth Rate (D ln yt), 1965–2000
Level of Development
Fertility and Life Expectancy Channels CMI Channel All Channels Low and Middle HIOECD
440
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14) (15)
Giniht⫺t ⫺.057* .004 ⫺.001 .033*** ⫺.069* ⫺.086* .021 .009 ⫺.062** ⫺.018 .027 ⫺.335
(.017) (.025) (.022) (.020) (.024 (.026) (.022) (.034) (.025) (.030) (.059) (.609)
FERTt⫺t ⫺.011* ⫺.010** ⫺.008* ⫺.009* ⫺.007** ⫺.007*** ⫺.010
(.003) (.004) (.003) (.003) (.003) (.004) (.019)
LEt⫺t .002* .002* .001*** .002* .002* .001** ⫺.011
(.000) (.000) (.001) (.000) (.000) (.000) (.011)
Ḣt⫺t .046**
(.023)
FDt⫺t ⫺.010 ⫺.052* .026 ⫺.035*** ⫺.014 ⫺.030
(.019) (.018) (.022) (.019) (.031) (.189)
FDt⫺t#
Giniht⫺t .030 .240* ⫺.049 .186** .029 .130
(.080) (.069) (.065) (.076) (.089) (.762)
ln yt⫺t ⫺.000* ⫺.005* ⫺.006* ⫺.008* ⫺.011* ⫺.016* ⫺.014* ⫺.003* ⫺.008* ⫺.024* ⫺.024* ⫺.009* ⫺.026* ⫺.059* ⫺.073*
(.000) (.000) (.000) (.000) (.001) (.001) (.000) (.001) (.000) (.001) (.001) (.000) (.001) (.018) (.020)
Educt⫺t ⫺.008 ⫺.001 ⫺.006 ⫺.002 ⫺.003 ⫺.001 ⫺.001 ⫺.004 .008 ⫺.006 .004 .001 .002 ⫺.006 ⫺.047
(.006) (.004) (.005) (.004) (.005) (.004) (.004) (.005) (.005) (.004) (.004) (.008) (.007) (.013) (.267)
(G/GDP)t⫺t ⫺.018 ⫺.020 .038 .027 ⫺.008 ⫺.012 ⫺.002 .015 .047 .030 .006 .009 ⫺.008 ⫺.001 .106
(.052) (.053) (.046) (.044) (.055) (.060) (.047) (.067) (.041) (.057) (.041) (.051) (.055) (.040) (.588)
Tradet⫺t .009 .012* .010* .011* .009** .009** .008** .015** .013* .012** .010* .014* .014** ⫺.002 .118
(.005) (.004) (.004) (.004) (.004) (.004) (.004) (.007) (.003) (.006) (.004) (.004) (.006) (.012) (.076)
Revolt⫺t ⫺.020** ⫺.020* ⫺.017** ⫺.015** ⫺.019* ⫺.019* ⫺.015** ⫺.011 ⫺.013** ⫺.010 ⫺.079 ⫺.019** ⫺.012c ⫺.046 ⫺.052
(.009) (.007) (.007) (.007) (.005) (.006) (.007) (.008) (.007) (.007) (.065) (.008) (.007) (.047) (.106)
Inflationt⫺t ⫺.179* ⫺.180* ⫺.187* ⫺.188* ⫺.183* ⫺.187* ⫺.185* ⫺1.450*** ⫺.168* ⫺1.430 ⫺.169* ⫺.180* ⫺1.420 ⫺2.592 ⫺5.778
(.023) (.025) (.014) (.015) (.021) (.023) (.020) (.843) (.016) (.929) (.014) (.025) (.898) (1.851) (13.132)
Constant .027 .098c .138c .140** .009 .034 .093 .079 .111 .120 .115 .128 .165** .594 1.788**
(.059) (.056) (.070) (.064) (.062) (.067) (.075) (.069) (.065) (.074) (.071) (.088) (.079) (.402) (.832)
Time
dummies Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
Countries 102 102 101 101 101 101 101 98 77 98 77 79 75 23 23
Obs. 676 694 685 685 683 683 683 521 477 520 477 513 369 181 151
AR(2) test .521 .982 .636 .639 .569 .563 .546 .953 .408 .937 .336 .830 .831 .481 .753
Hansen J-test .364 .598 .456 .738 .700 .874 .990 .910 .997 .999 1.000 .983 1.000 1.000 1.000
Diff. Hansen
J-test .484 .954 .656 .988 .934 .999 1.000 .999 1.000 1.000 1.000 1.000 1.000 1.000 1.000
Note.—Two-step system GMM estimation. Robust standard errors with Windmeijer finite-sample correction. Dependent variable is per capita income
441
growth rate. See the text for the definition of the explanatory variables. CMI p credit market imperfections.
tancy, and the Gini index enter together in the set of controls, the impact
of life expectancy and fertility rates holds, whereas the independent
influence of the Gini index becomes even positive (col. 7). Therefore,
these results suggest that demographic channels capture most of the
effect of human capital inequality on economic growth.
Although the evidence displayed so far shows that a large part of the
effect of human capital inequality on growth is explained to a great
extent by demographic mechanisms, in the remaining columns I test
whether credit market constraints have any explanatory power in such
an effect. Results show that the statistical significance of the effect of
financial development depends a great deal on the measure used. Col-
umn 8 shows no significant effect of financial development and its in-
teraction with the Gini coefficient on the growth rates. However, if,
instead of measuring private credit from the latest version of Beck et
al. (2009), I measure private credit with the variable Privo, as in Levine
et al. (2000), the estimated coefficient of FD and its interaction with
the Gini coefficient have the expected signs and are statistically signif-
icant at the 1 percent level (col. 9). When all the channels enter in the
growth equation, results show that whereas lower fertility rates and
higher life expectancy are significantly related to higher growth rates,
the effect of the credit market imperfection approach is highly sensitive
to the measure of financial development used (cols. 10 and 11).37
Results in the previous section suggest that the effect of human capital
inequality on the growth rates of per capita income should be stronger
in less developed economies, where the fertility, life expectancy, and
credit market imperfection approaches have stronger empirical evi-
dence. Column 12 shows the effect of the human capital Gini coefficient
on the growth rates in low- and middle-income countries. The estimated
coefficient of the Gini index is negative, statistically significant, and
higher in absolute terms. Moreover, in line with the fertility and life
expectancy mechanisms, the coefficient is no longer statistically signif-
icant once the channels are included in the set of controls (col. 13).
On the contrary, the estimated coefficient of the Gini index is positive,
although not statistically significant, in the sample of the high-income
OECD economies (col. 14). Likewise, neither the fertility rates nor life
expectancy has a significant effect on the growth rates of these econ-
omies.
An alternative interpretation for these results can be found in Ehrlich
and Kim (2007). In their model, the association between inequality and
growth can go in different directions over the development phase de-
pending on the type of shock that produces a takeoff, the way it reaches
different family groups, and whether the economy is in a stagnant or
37
The measure of private credit by deposit money banks and other financial institutions
as a share of GDP by Beck et al. (2009) is used in cols. 8 and 10 and the corresponding
measure by Levine et al. (2000) in cols. 9 and 11.
growth steady state or in a transitional development phase. The non-

monotonic relationship between inequality and growth is also in line
with Barro (2000), which finds a negative link between income inequal-
ity and economic growth in poor countries and a positive link in richer
ones.
The reliability of the results obtained using the system GMM depends
on how valid the instruments are. I report the diagnostic tests at the
bottom of the table. The p-values of the AR(2) test and the Hansen J-
test suggest that the specification is correct. Moreover, as an additional
test of the validity of the additional orthogonality conditions for the
level equation, the p-values of the difference Hansen test show that the
additional instruments associated with the system GMM are valid.
VII. Conclusions
It has been common in the empirical literature on inequality and eco-
nomic growth to estimate reduced-form equations in which an income
inequality variable is added to a set of standard determinants of growth
rates. However, the reduced form of the model does not provide any
information about the relevant mechanisms through which inequality
influences growth or how they operate. In addition, the puzzling em-
pirical findings regarding the effect of income inequality on economic
growth indicate that the mechanisms connecting these two variables are
still unclear.
By using human capital inequality data and by estimating a system of
equations, this paper is able to disentangle some of the channels through
which human capital inequality influences human capital investment
rates. The findings reveal that human capital inequality affects human
capital accumulation through its effects on fertility and life expectancy,
which capture most of the total effect of human capital inequality on
economic growth. Further evidence of this relationship comes from the
fact that in many highly unequal societies, the financial market is un-
derdeveloped, which strengthens the negative effect by restricting poor
uneducated families from financing the education of their offspring.
These results are robust to an array of sensitivity tests and are shown
not to be driven by the omission of relevant variables; the estimation
of a dynamic panel data model that controls for unobservable hetero-
geneity and endogeneity of the regressors confirms the foregoing find-
ings.
Does inequality encourage or discourage economic growth? Empirical
evidence leads to the belief that a conclusive answer cannot be given
regarding the relationship between income inequality and economic
growth (Barro 2000; Forbes 2000). However, the evidence displayed in
this paper indicates that a more unequal distribution of education dis-
courages investment and hinders growth. Furthermore, this effect is
consistent with the explanations related to differentials in fertility and
life expectancy between educated and uneducated families and credit

restrictions in human capital investment.
Analyzing the channels through which human capital inequality in-
fluences economic growth is relevant because it provides a better un-
derstanding of the costs of inequality and a guide to design the best
policies to tackle its economic consequences. In fact, the policy impli-
cations of the impact of human capital inequality through these mech-
anisms are quite different from the theories that emphasize a trade-off
between equity and growth, since higher income inequality may increase
pressures for redistribution. Quite the opposite, the results found in
this paper suggest that a more even distribution of opportunities
through widespread access to education may improve not only the stan-
dard of living of individuals but also the economic performance of
countries as a whole.
Appendix
TABLE A1
Descriptive Statistics of the Main Variables
Mean
Standard
Mean Deviation Minimum Maximum LaAm SAfrica Asiae HIOECD
Ḣ1980–2000 .606 .308 .060 1.192 .547 .274 .625 1.004
Ginih1960 .543 .284 .098 .992 .464 .800 .614 .240
1st quint h60 .033 .058 .000 .173 .017 .000 .000 .112
3rd quint h60 .212 .207 .000 .537 .262 .038 .106 .422
5th quint h60 .590 .276 .254 1.000 .475 .842 .587 .343
(1st Q/5th Q)h60 .107 .190 .000 .603 .054 .000 .000 .361
ln y1960 8.144 .965 6.361 11.491 8.240 7.262 7.535 9.059
Educ1960 .588 .704 .017 3.104 .432 .110 .453 1.359
FERT1960–80 4.991 1.831 1.958 8.052 5.311 6.593 4.855 2.542
LE1960–80 58.854 11.138 33.870 74.551 60.133 45.170 58.773 71.374
FD1960–80 .283 .201 .014 1.043 .216 .147 .321 .497
PSE60–80 .038 .014 .012 .072 .033 .037 .032 .047
Urbanization60 39.773 25.268 1.800 100 43.543 13.916 35.283 62.319
Infant mortality60 93.884 54.494 15.100 226.961 99.140 143.763 83.582 30.785
Hospital beds60 4.253 3.526 .116 15.100 3.141 1.936 2.023 8.824
Polit instability60–80 .087 .107 .000 .468 .138 .086 .112 .031
German .048 .215 .000 1.000 .000 .000 .167 .190
Latitude .270 .193 .000 .722 .172 .135 .136 .535
Catholics 38.593 38.646 .000 96.900 77.904 23.768 16.433 38.367
Muslims 17.318 31.730 .000 99.100 .909 25.474 19.733 .463
Protestants 15.720 24.171 .000 97.800 7.904 17.605 4.167 32.067
Countries 83 83 83 83 23 19 6 21
Diff. FERT80 2.463 1.466 .099 5.300 3.629 2.338 1.840 .774
Countries 51 51 51 51 17 13 5 9
Predicted mortality40 .473 .284 .121 1.126 .611 . . . .572 .268
Pop sex ratio60 1.006 .044 .886 1.131 1.008 . . . 1.005 .988
Countries 45 45 45 45 16 0 5 21
TABLE A2
Data Definition and Sources
Variable Definition Source
h
Gini Human capital Gini coefficient Castelló and Domé-
nech (2002), up-
dated
1st quintile Share of education attained by the least Castelló and Domé-
educated 20% of individuals nech (2002), up-
dated
3rd quintile Share of education attained by the least Castelló and Domé-
educated 60% of individuals nech (2002), up-
dated
5th quintile Share of education attained by the top Castelló and Domé-
20% of the most educated individuals nech (2002), up-
dated
1st quintile/5th Share of education attained by the ratio Castelló and Domé-
quintile between the bottom and top quintiles nech (2002), up-
dated
y Real GDP per capita (chain), 2005 con- Heston et al. (2009)
stant prices
Infant mortality Infant mortality rate (per 1,000 births) U.N. Population Divi-
sion (2009)
Urbanization Urban population (% total population) Easterly and Sewadeh
(2002)
Hospital beds Hospital beds (per 1,000 people) World Bank (2004)
Catholic Percentage of the population belonging La Porta et al. (1999)
to the Catholic religion
Muslims Percentage of the population belonging La Porta et al. (1999)
to the Muslim religion
Protestant Percentage of the population belonging La Porta et al. (1999)
to the Protestant religion
German Legal origin: German commercial code La Porta et al. (1999)
Latitude Absolute value of the latitude of the La Porta et al. (1999)
country, scaled to take values between
0 and 1
FERT Fertility rate, total births per woman World Bank (2004)
Diff. FERT Fertility differentials between women Kremer and Chen
with the highest and the lowest edu- (2002)
cation levels
LE Life expectancy at birth, years World Bank (2004)
Educ Average years of secondary schooling of Barro and Lee (2010)
population 25 years and over
PSE Public spending on education, total (% Barro and Lee (1994)
of GDP)
Political instabil- (0.5#number of assassinations per mil- Barro and Lee (1994)
ity lion population per year) ⫹
(0.5#number of revolutions per
year)
FD Private credit by deposit money banks Levine et al. (2000)
and other financial institutions to and Beck et al.
GDP (2009)
Pred mortality40 Predicted mortality in 1940 Acemoglu and Johnson
(2007)
Pop sex ratio60 Ratio between the male and female Author’s calculation
population aged 15–49 in 1960 from Barro and Lee
(2010)
G/GDP Government share of real GDP Heston et al. (2009)
TABLE A2 (Continued)
Variable Definition Source
Trade Exports plus imports to real GDP Heston et al. (2009)
Revol Number of revolutions per year Banks (2010)
Inflation Annual growth rate of consumer prices Easterly and Sewadeh
(2002)
Primary enroll- Gross enrollment rate in primary educa- UNESCO and Barro
ment tion and Lee (1994)
Secondary en- Gross enrollment rate in secondary edu- UNESCO and Barro
rollment cation and Lee (1994)
TABLE A3
List of Countries
Algeria CS El Salvador CS LA Nepal CS
Benin SA Guatemala CS LA Pakistan CS
Botswana CS SA Haiti CS LA Philippines CS EAs
Cameroon CS SA Honduras CS LA Singapore CS EAs
Central Afr. Rep. CS SA Jamaica CS LA Sri Lanka CS
Congo CS SA Mexico CS LA Syria CS
Egypt CS Nicaragua CS LA Taiwan EAs
Gambia CS SA Panama CS LA Thailand CS EAs
Ghana CS SA Trinidad&Tobago CS LA Yemen
Kenya CS SA United States CS HI Austria CS HI
Lesotho CS SA Argentina CS LA Belgium CS HI
Malawi CS SA Bolivia CS LA Cyprus CS
Mali SA Brazil CS LA Denmark CS HI
Mauritania SA Chile CS LA Finland CS HI
Mauritius CS SA Colombia CS LA France CS HI
Mozambique SA Ecuador CS LA Germany CS HI
Niger CS SA Guyana CS LA Greece CS HI
Rwanda CS SA Paraguay CS LA Hungary
Senegal CS SA Peru CS LA Iceland CS HI
Sierra Leone CS SA Uruguay CS LA Ireland CS HI
South Africa SA Venezuela CS LA Italy CS HI
Sudan CS SA Bahrain CS Netherlands HI
Swaziland CS SA Bangladesh Norway CS HI
Tanzania SA China Poland
Togo CS SA Hong Kong EAs Portugal CS HI
Tunisia India CS Spain CS HI
Uganda SA Indonesia CS EAs Sweden CS HI
Zaire CS SA Iran, I.R. of CS Switzerland HI
Zambia SA Israel CS Turkey
Zimbabwe CS SA Japan CS HI United Kingdom CS HI
Barbados CS LA Jordan CS Australia CS HI
Canada CS HI Korea CS EAs HI Fiji CS
Costa Rica CS LA Kuwait CS New Zealand CS HI
Dominican Republic CS LA Malaysia CS EAs Papua New Guinea CS
Note.—CS p included in the 83-country pure cross-sectional data set; SA p sub-Saharan
Africa; LA p Latin America and the Caribbean; EAs p East Asia; HI p high-income
OECD.
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Channels through Which Human Capital Inequality Influences Economic Growth

Author(s): Amparo Castelló-Climent

This paper empirically investigates the theoretical predictions of some of the

[Journal of Human Capital, 2010, vol. 4, no. 4]

Figure 1.—Fertility channel

investment rates. Nevertheless, the empirical evidence on this issue is

Figure 2.—Life expectancy channel

capital investment rate in this African region would have increased by

and Kim (2007) show a growth-equilibrium steady state in which both

In order to gain a better understanding of the link between inequality

II. Theoretical Predictions

in a poor country converge to a low education equilibrium and the

Instead of analyzing a specific direction of causality, more recently,

2. Life Expectancy Channel

poverty persistence. In a context of perfect capital markets, Castelló-

We expect, holding fixed other factors, a more unequal distribution of

B. Credit Market Imperfection Approach

focuses on investment in human capital. In this model, wealth trans-

Ḣ p k 0 ⫹ k 1 INEQUALIT Y h ⫹ k 2 CMC ⫹ k 3 INEQUALIT Y h # CMC

III. Analysis of the Channels

In order to decompose the total effect of human capital inequality on

fertility, life expectancy, and credit market imperfection approaches can

⫹ a 4 FERTi,t⫺k ⫹ a 5 LEi,t⫺k ⫹ a 6 Ginii,t⫺t

⫹ a 8 Ginihi,t⫺t # FDi,t⫺k ⫹ mi,t,

FERTi,t⫺k p b 0 ⫹ b1 ln yi,t⫺t ⫹ b2 Educi,t⫺t ⫹ b3 Ginihi,t⫺t

LEi,t⫺k p r 0 ⫹ r1 ln yi,t⫺t ⫹ r 2 Educi,t⫺t ⫹ r 3 Ginii,t⫺t

Ḣi,t p g0 ⫹ g1 ln yi,t⫺t ⫹ g2 Educi,t⫺t ⫹ g3 PSEi,t⫺t

⫹ g4 X i,t⫺t ⫹ g5Wi,t⫺t ⫹ g6 Ginihit⫺t ⫹ g7 FDi,t⫺k (7)

⫹ g8 Ginihit⫺t # FDi,t⫺k ⫹ hi,t,

hi,t p a 4 # ni,t⫺k ⫹ a 5 # ei,t⫺k ⫹ mi,t .

The analysis of the channels is tested in a cross section of 83 countries

institutions to GDP. Source: Levine et al. (2000) and Beck, Demirgüc-

In order to implement a convincing empirical test, the following econ-

estimated covariance matrix from the second stage as a weighting matrix

IV. Empirical Results

problems of endogenous regressors and reverse causation, fertility rates

theoretical papers predict a causal effect from infant mortality on fertility

the majority of the population is either Catholic, Muslim, or Protestant

B. Life Expectancy Equation

across countries. In the next columns I check the robustness of this

In column 3 I include infant mortality in the set of controls, on the

C. Human Capital Investment Equation

D. Measuring the Impact of Each Channel

technique is ⫺0.448, which is almost equal to the reduced-form estimate.

ratio of male to female population aged 15–49 as an instrument for

FERT FERT LE FERT LE FERT LE

Asiae .058 .060 .057 .062 .059 .058 .003

Table 6 analyzes the channels individually in the reduced sample of

give any information on the shape of the distribution. As the relevant

Note.—Robust standard errors are in parentheses.

inequality is significantly related to higher fertility rates and lower life

whether the results are driven by a few influential observations. In order

VI. Human Capital Inequality and Economic Growth

positive and significant relationship with subsequent economic growth

(ln yi,t ⫺ ln yi,t⫺t)/t p b ln yi,t⫺t ⫹ gInequalityi,t⫺t ⫹ X i,t⫺t d (8)

ln yi,t p b˜ ln yi,t⫺t ⫹ gInequality

where yit is real GDP per capita in country i measured at year t; t is a

growth steady state or in a transitional development phase. The non-

life expectancy between educated and uneducated families and credit

Becker, G. S., K. M. Murphy, and R. Tamura. 1990. “Human Capital, Fertility,

Do Economic Volatility and Credit Constraints Matter?” J. Development Econ.

Schultz, T. P. 1997. “Demand for Children in Low Income Countries.” In Hand-

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