Relationship Between Human Capital and Income Distribution of a Developing Economy: Empirical Evidence From Ethiopia

Abstract

Purpose: The purpose of this study is to examine the long-run effect of human capital accumulation on the income distribution of a developing economy such as Ethiopia. Study design: The study is based on time series data covering the period from 1980/1981 to 2019/2020. The autoregressive distributed lag (ARDL) bounds co-integration test and error correction model approach is employed as a method of econometric estimation. Findings: The bounds test revealed a significant and stable long-run equilibrium relationships exist between income inequality (Gini coefficient) and its dynamic regressors of human capital accumulation indicators as well as other explanatory variables. Results of the estimated long-run selected model indicated that secondary and tertiary education attainments as well as total fertility rate have a significant un-equalizing income distribution effect on the country’s economy at the conventional level of significance in the long run. On the contrary, primary education attainment of the labor force has a positive and statistically significant impact on the country’s distribution of income at the standard level of significance. On the contrary, the employment-to-population size ratio has a positive effect, but financial development and institutional and governance quality have an adverse effect on the income distribution of the country in the long run. With respect to the short-run error correction model result, a temporary disequilibrium level of income distribution in the previous period is corrected by approximately 0.9284 in the current period to bring back to a stable long-run equilibrium. Based on these findings, it is important to strengthen and improve the country’s education and health service system for those individuals who are marginalized and deprived from these levels of social services. Originality/value: A few empirical studies on the dynamics between human capital and income distribution have been conducted at cross-country using average years of schooling as a proxy measure of human capital. The novelty of this study is that it examines the relationship between human capital and income distribution at a single country level using the ARDL bounds co-integration and error correction model approach. Furthermore, human capital accumulation is proxied by both education capital (disaggregated by primary, secondary, and tertiary educational attainments) and health capital (life expectancy at birth and total fertility rate) in addition to other relevant explanatory variables for better estimation and policy implications. JEL classification B23, C22, I14, I24, O15