The Accumulation of Human Capital and Income Inequality in a Two-Sector Economy

Abstract

A two-sector endogenous growth model linking human capital accumulation and income inequality is developed. Productivity increases in the final output sector have no effect on growth or inequality. Productivity increases in the human capital sector raise the growth rate, but their effect on income inequality depends on sectoral factor intensities. Income inequality and welfare inequality are driven by different factors and are likely to respond in opposite ways to productivity enhancement in the human capital sector. Finally, the gradual introduction of a productivity increase generates dynamics in both human capital inequality and income inequality, leading to permanent path-dependent effects.