Policy Wise

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In a very interesting piece, economists Gary Becker and Kevin M Murphy argue that inequality can have a positive effects if it can create an incentive to tackle its root cause: rising payoff of college education.

Why is the earnings gap widening? Because the demand for educated and other skilled persons is growing. That is hardly surprising, given developments in computers and the Internet, advances in biotechnology, and a general shift in economic activity to more edu­cation-intensive sectors, such as finance and professional services…

This brings us to our punch line. Should an increase in earnings inequality due primarily to higher rates of return on education and other skills be considered a favorable rather than an unfavor­able development? We think so. Higher rates of return on capital are a sign of greater productivity in the economy, and that inference is fully applica­ble to human capital as well as to physical capital. The initial impact of higher returns to human cap­ital is wider inequality in earnings (the same as the initial effect of higher returns on physical capital), but that impact becomes more muted and may be reversed over time as young men and women invest more in their human capital.

We conclude that the forces raising earnings inequality in the United States are beneficial to the extent that they reflect higher returns to invest­ments in education and other human capital.(empahsis added) [link]

This is indeed a persuasive argument. Studies have demonstrated that the difference in income between college graduates and others has consistently risen. However, as the Economist blog points out, it also calls for policy measures including increased funding which would ensure that higher education is accessible to all and not just a tiny elite.

What lessons it may hold for India? One, rapid expansion of higher education by facilitating the entry of private sector. Currently, the government measures are designed to restrict higher education to a tiny elite. Second, provision of easy student loans e.t.c so the poor can easily pay for their education. For there can be no doubt: Higher education in a country as poor as India is still a privilege.

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