Income inequality and human capital allocation

Abstract

This study discusses the relationship between income inequality and human capital allocation in China. We categorise income inequality into intersectoral (state- versus non-state owned) and intergenerational income inequality. Based on relevant theoretical assumptions and empirical tests using existing regional data, we find that income inequality influences regional human capital allocation in China in three ways. First, intersectoral income inequality has a negative impact on regional human capital mismatch (i.e., inconsistency between job skill requirements and workers' actual skills). Second, intergenerational income inequality positively affects regional human capital mismatch. Third, the interaction of intersectoral and intergenerational income inequality has a negative impact on human capital mismatch. Thus, we observe differences in the net impact of intersectoral and intergenerational income inequality on human capital mismatch in China. The net impact of intersectoral income inequality on human capital mismatch is persistently negative, while the impact of intergenerational income inequality on human capital mismatch is contingent upon the degree of regional intersectoral income inequality. However, the imbalance in China’s regional development creates discrepancies in the relationship between improvement in income equality across regions and optimisation of human capital allocation. Thus, the process of formulating relevant policies must be regional, long-term based, and phased.