erc/metu
INTERNATIONAL CONFERENCE IN ECONOMICS  IV
September 13-16, 2000, Ankara

Income Distribution with Human Capital Accumulation and Specialisation

Fazeer Sheik Rahim (University of Birmingham, UK)
Alev Argenç Katrinli (Dokuz Eylül Unıversity)

Abstract

This paper investigates the links between income distribution, human capital accumulation and specialisation in the process of development. It looks at a case of income trickle-down from the rich to the poor operating through specialisation and human capital accumulation. In this highly stylised economy, entrepreneurs coordinate teams of workers in the pro-duction of a single good. To become an entrepreneur, one needs a certain level of ability and wealth. The level of technology depends on the aggre-gate human capital of entrepreneurs. This provides the key contribution of the paper: by improving the level of technology in the economy, human capital accumulation by the rich (entrepreneurs) increases the degree of specialisation, which, in turn, increases the wage of the poor (workers). This has two effects. On the one hand, it leads workers to transmit more wealth to their off-springs, thereby increasing their likelihood of the latter becoming entrepreneurs. On the other, by squeezing the wage gap, it reduces the incentive to becoming an entrepreneur. There is a critical fraction of entrepreneurs above which the first effect will dominate. If this is the case, there is income trickle-down and steady-state income distribution becomes invariant to initial distribution. This does not reduce, however, the role of government which can, through redistribution, speed up the trickle-down process or, through education subsidies, increase steady-state income level. In the alternative case where the fraction of entrepreneurs is lower than the critical level, the economy converges to a low-income, low-wage and low-mobility, non-ergodic steady-state. In this dual economy, endogenous cycles will appear.

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