Academic journal article International Journal of Business and Society

On the Relationship between Human Capital Inequality and Globalization

Academic journal article International Journal of Business and Society

On the Relationship between Human Capital Inequality and Globalization

Article excerpt

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The debate on the effect of globalization on income distribution is often divided between two points of view. Under the Stolper-Samuelson theorem of the Heckscher-Ohlin (H-O) theory, globalization should be beneficial for poor and developing countries by reducing inequality and giving opportunities for least educated workers to acquire the benefits of globalization (Kremer and Maskin, 2003). Various studies (Tayebi and Ohadi (2009), Bechtel (2014) among others) have found that globalization leads to the rise of income, which will benefit not only the high-income, but also low-income groups. On the contrary, some studies argue that the opportunities and benefits of globalization are not shared equally among the citizens, thus widening the gap between the low and high-income groups (see Kanbur (2000), Basu and Guariglia (2007), Gaston and Rajaguru (2009), Bergh and Nilsson (2010) among others). Cross-country studies on developing countries based on H-O theory generally imply that trade liberalization is associated with higher inequality and does not benefit poor income countries as pointed out by Kremer and Maskin (2003). Others have also found insignificant effect of globalization on inequality, which contradicts the theory1. Calderon and Chong (2001) prove that greater openness leads to lower inequality in developing countries. It is still a debate in both theoretical and empirical literature of whether globalization is associated with narrowing or widening income distribution within the developing countries.

This study aims to contribute to the existing literature by attempting to prove and analyze the competence of the standard H-O theory on inequality and globalization. We tackle the inequality and globalization issue by departing from the usual convention and studying the effect of globalization on another distribution, which is the distribution of human capital2. In other words, we would like to investigate whether globalization helps to alleviate or aggravate inequality in education and benefit everyone in the observed population in the same way in terms of education. Moreover, we would also like to analyze whether the benefit or loss experienced by countries differ across the level of development.

The main objectives of this chapter are to answer the following questions:

(1) How is globalization related to human capital inequality?

(2) Does the effect of globalization depend on the level of development of a country?

Deininger and Squire (1998) argue that income inequality maybe a poor proxy for distribution of wealth and propose land inequality as an alternative measure. It is non-trivial to study human capital inequality to proxy for wealth/asset inequality for a number of reasons. First, the stock of human capital is one of the determinants of current and future income; hence, the distribution of human capital can provide a good indicator of income inequality. Glomm and Ravikumar (1992), Saint-Paul and Verdier (1993) and Galor and Tsiddon (1997) among others develop models that show the main source of inequality is the distribution of human capital. Second, the human capital distribution can be considered as approximate determinants of the distribution of earnings since it is determined by individual ability and investment financing (Thomas et al., 2001). Lastly, an equal distribution of human capital is an important factor in determining individual productivity and reducing poverty besides land or other wealth indicators. Human capital can be considered as an opportunity and the equal distribution of opportunity is always preferred than the distribution of wealth because of its spillover effects (Thomas et al., 2001).

Additionally, Checchi (2001) asserts that income inequality and educational choice are two different concepts, which are often misled by the theoretical assumptions. In many theoretical models3, income inequality and educational choice are assumed to be perfectly correlated and influenced by the same factors. …

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