Why Education Policies Matter for Equality

IMF Blog, September 8, 2014

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Author: Era Dabla-Norris
Date: September 8, 2014
Central claim: Improvements in education—even more than factors such as government expenditure or financial sector development—have contributed in an important way to reducing income inequality within countries.

Examines whether a country’s income distribution becomes more equal as it grows richer.
Key empirical finding:
- A one percent increase in GDP per capita reduces the Gini coefficient—a measure of income inequality that ranges from 0 for perfect equality to 1 for absolute inequality—by around 0.08 percentage points.
Distributional effects of growth:
- Growth in a country’s GDP boosts the relative income share of the poor and the middle class at the expense of the richest 20 percent.
- These results hold true across regions and across different stages of development.
Education identified as a key channel through which increased prosperity helps reduce inequality.

Technology and globalization can increase labor income and earnings inequality, despite overall growth reducing inequality.
Mechanisms:
- Technological change advantages those adept at working with computers and information technology.
- Global supply chains move low-skilled jobs out of advanced economies, depressing prospects of workers who previously held these jobs; initial beneficiaries in destination countries are often more skilled workers.
Policy-relevant implication:
- Better education helps individuals cope with technological and environmental changes that affect productivity and is the best policy to help countries avoid the inequality-increasing effects of technological change and globalization.

For advanced economies (example: United States):
- Increase the supply of highly educated workers.
- Address high school dropout rates and the share of high school graduates who are not college-ready.
- Tackle the high cost of higher education that is prohibitively expensive for many families.
For developing countries:
- Raise levels of educational attainment where access to basic education remains constrained by market failures and inefficient policies.
- Promote equal access to basic education through policies such as cash transfers aimed at encouraging better attendance at primary schools.
- Increase spending on public education that benefits the poor to build human capital and make educational opportunities less dependent on socioeconomic circumstances.
Broad focus for education policies:
- Help students achieve strong academic outcomes.
- Encourage continuation to higher levels of education.
- Ensure acquisition of skills needed to succeed in a globally competitive economy.
- Foster greater intergenerational earnings mobility and help reduce income inequality over time.

IMF Blog: "Why Education Policies Matter for Equality", Era Dabla-Norris, September 8, 2014