Essays on Human Capital Accumulation and Inequality

Abstract

This thesis is composed by four independent chapters. Their common denominator is the process of human capital accumulation analyzed under different perspectives and using different techniques. In the following I will shortly describe each chapter in more detail. Chapter 1 addresses an important aspect of the effects of trade liberalization that has gained much attention in recent years: raising skill premia. It is motivated by recent evidence showing that trade liberalization in developing countries is often associated with a large increase in wage inequality. I investigate the mechanism through which a trade related increase in the demand for skilled labor affects human capital investment and the wealth distribution of a developing country economy. In particular I focus on a scenario where the liberalizing economy is in a poverty trap. This is because developing economies are often plagued by credit market imperfections. Imperfect financial markets raise the probability that individuals are constrained in their human capital investment decisions and that the economy is a poverty trap. I use a standard overlapping generation model to show how a trade related increase in the demand for skilled labor can release a developing country from a poverty trap, leading to increased human capital accumulation and technology progress. The skill biased technological shock benefits the whole economy and "trickles down" - through the interest rate - to unskilled workers a la Aghion & Bolton (1997). Chapter 2, which is joint work with Lidia Farre, analyzes the educational choices of Argentinean teenagers during different phases of the economic cycle. We use data for Argentinean households over the period 1995-2002 to examine households' response to negative idiosyncratic income shocks in different macroeconomic scenarios. We study how teenagers' school progress responds to household head unemployment during periods of high economic growth and compare it to the response during recession years, when families are more likely to be financially constrained. After accounting for the potential endogeneity of household head unemployment we find that school failure in response to unemployment shocks increases during periods of economic instability. Further we find that for first born boys this results from a greater involvement in labor market activities. Our results add to the existing literature on the long term cost of macroeconomic crises. In Chapter 3 I analyze a different aspect of the Argentinean macroeconomic crisis and the related social costs. Argentina experienced an important increase of informal employment and wage dispersion in the last 20 years. This chapter extends a search model with exogenous human capital accumulation to include an informal sector. The model is parametrized such to fit Argentinean data in order to investigate the effect of employment protection measures on informality, employment and wage dispersion under two different macroeconomic conditions. I find that for low educated workers both severance pay and minimum wages increase informality. In the presence of vii a wage floor severance payments do not affect employment but only shift marginal workers from the covered sector to the unregulated one. I find that a decrease in the return to human capital skills increases the incentives to seek informal employment. Labor market protection measures and declining human capital return are able to explain most of the increase in informality and much of the increase in wage dispersion. Last chapter is coauthored with Christian Dustmann and focuses on the very early phases of human capital investment: pre school years. In this chapter we investigate test score gaps and their evolution for white and ethnic minority children aged 3 and 5 in the UK. We also analyse the effect of early school exposure on test score gaps, and differences in the effect of entry age on early school performance. Ethnic test score gaps at age 3 - when most children are not enrolled in Kindergarten yet - are large. Background characteristics (in particular exposure to the English language) explain part, but not all of this differential. Between the age of 3 and 5, the ethnic test score gap narrows. Exposure to preschool measured at age 5 - even if limited to only a few months - has a larger positive effects on test scores for those minority groups who started from a more disadvantaged position. Further, keeping exposure to pre-school constant, ethnic minority children loose less from entering pre-school at a younger age than majority individuals; for some groups, there is an overall gain from entering school early. Our findings point at a reduction in achievement gaps between minority and majority children in the UK between age 3 and age 5, which is partly due to a larger positive effect of pre-school on achievements of minorities.