Income Inequality and Human Capital Accumulation in Ghana

The emergence of the demand for educated or skilled workers in the course of devel- opment has created an important role for human capital accumulation in promoting economic growth. As a result, a lot of research efforts has been devoted to under- standing both the growth enhancing role of human capital and the sources of the stark cross-country differences in the level of human capital accumulation. A recent theory, proposed by Galor, Moav and Vollrath (2009), has postulated that the de- gree of land concentration in a country has significant effects on its human capital formation and economic growth. According to the theory, inequality in landowner- ship delays the implementation of human capital promoting institutions and policies and therefore adversely affects human capital formation and economic growth. Ab- stracting from this theory, this study hypothesizes that, in the absence of serfdom, useful data on land distribution and highly developed financial markets, increasing income inequality can hinder human capital development by limiting the financial capabilities of a large section of poor people to efficiently invest in education and other forms of human capital developing activities.

This thesis is aimed at testing the relationship between inequality and human capital in the context of Ghana, a developing country in West Africa, characterized by increasing national and sub-national income inequality and low levels of human capital development (as reflected, particularly, in low literacy rates and low levels of school attainments). In so doing, the study constructs regional indices for income in- equality, indicators of human capital, and other demographic and geographic factors from 4 waves of a nationwide living standard surveys covering the period 1992-2013. Probit and fixed effects estimators were employed to investigate the impact of in- come inequality on human capital, while controlling for a myriad of individual and region specific factors that might influence schooling and therefore human capital accumulation in Ghana.

This paper finds that inequality in the distribution of income adversely affected human capital, using variations in the distribution of income and school enrollment across regions in Ghana over the past two decades. This result is in line with Galor et al. (2009). The results of the probit estimation demonstrate that increasing income inequality significantly lowers the probability of an individual (especially a girl of school going age) being currently enrolled in school or ever being to school.

This result is robust to both the estimator choice and the use of alternative measures of human capital. In agreement with the results of the probit model, the results of the fixed effect model also show that there is a significant negative relationship between income inequality and human capital, regardless of which measure of human capital is adopted. By intuition, inequality decreases human capital accumulation. Inequality decreases the number of poor households that would allow their wards to forgo the returns to child labour activities rather than attend school.

In other words, households in poverty might be in favour of their wards engaging in an income generating activity at the detriment of enrollment or ever going to school. Besides this possibility, rich individuals, most of whom are the political elites, are likely to opt out of enrollment promoting activities in the country in favour of sending their wards to foreign schools. This has adverse effects on the quality of educational infrastructure, academic performance and the pace of human capital accumulation. This paper further demonstrates that, other factors namely geographical factors, religious composition and individual preferences affect human capital accumulation. In agreement with Galor's (2011) Unified Growth Theory, these factors exert significant effects on the likelihood of ever being in school and the rate of school enrollment in Ghana.