Human Capital and Equity-Adjusted Income: A BMA-Based Decomposition Approach
Main Article Content
Abstract
This paper utilizes the Bayesian Model Averaging (BMA) methodological approach to explore how human capital affects equity-adjusted income and its growth rate, commonly described as inclusive growth and defined as income growth adjusted for changes in income distribution. The equity-adjusted income measure that we use is broken down into real GDP per capita and the income equity index (IEI) as its component parts. Framed in this way, the measure is designed to capture how fairly different levels and changes in national income are shaped. In this paper, we study how the preferred measure responds to human capital, a factor widely established as a major driver of both higher income growth and greater equity. We proxy human capital using variables for education and health and, alongside a set of standard growth determinants as controls, incorporate them into a BMA estimation setting. In this context, the main objective of the paper is to determine whether human capital contributes to equity-adjusted income mainly by increasing real GDP per capita or by improving income distribution. Put differently, the paper asks which of these two dimensions accounts more for the overall link between human capital and equity-adjusted income. The estimation results indicate that human capital variables do not exhibit robust effects on inclusive growth rates as originally defined. However, both education and health show robust and positive effects on the level of equity-adjusted income in logarithmic form. The structural decomposition we perform further suggests that the GDP per capita channel is materially more important, although education also retains a meaningful role through the income equity component. This outcome holds regardless of which proxy is included in the estimation.
Article Details
Issue
Section
This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.
Once the manuscript is accepted for publication, authors shall transfer the copyright to the publisher. If the submitted manuscript is not accepted for printing by the journal, the authors shall retain all their rights. The following rights on the manuscript are transferred to the publisher, including any supplementary materials and any parts, extracts or elements of the manuscript:
- the right to reproduce and distribute the manuscript in printed form, including print-on-demand;
- the right to print prepublications, reprints and special editions of the manuscript;
- the right to translate the manuscript into other languages;
- the right to reproduce the manuscript using photomechanical or similar means including, but not limited to photocopy, and the right to distribute these copies;
- the right to reproduce and distribute the manuscript electronically or optically using and all data carriers or storage media, and especially in machine readable/digitalized form on data carriers such as hard drive, CD-ROM, DVD, Blu-ray Disc (BD), Mini Disc, data tapes, and the right to reproduce and distribute the article via these data carriers;
- the right to store the manuscript in databases, including online databases, as well as the right to transmit the manuscript in all technical systems and modes;
- the right to make the manuscript available to the public or to closed user groups on individual demand, for use on monitors or other readers (including e-books), and in printable form for the user, either via the Internet, online service, or via internal or external networks.
References
Alekhina, V., & Ganelli, G. (2023). Determinants of inclusive growth in ASEAN. Journal of the Asia Pacific Economy, 28(3), 1196–1228.
Anand, R., Mishra, S., & Peiris, S. J. (2013). Inclusive growth: Measurement and determinants (IMF Working Paper No. 13/135). International Monetary Fund.
Angulo-Bustinza, H., Florez-Garcia, W., Calderon-Contreras, V., Peña-Cobeñas, D., Barrientos-Moscoso, M., & Zeballos-Ponce, V. (2023). Determinants of inclusive economic growth in Latin America. WSEAS Transactions on Business and Economics, 20, 1059–1073.
Aoyagi, C., & Ganelli, G. (2015). Asia’s quest for inclusive growth revisited. Journal of Asian Economics, 40, 29–46.
Aslam, A., Naveed, A., & Shabbir, G. (2021). Is it an institution, digital or social inclusion that matters for inclusive growth? A panel data analysis. Quality & Quantity, 55(1), 333–355.
Asongu, S. A., & Odhiambo, N. M. (2019). Doing business and inclusive human development in Sub-Saharan Africa. African Journal of Economic and Management Studies, 10(1), 2–16.
Barro, R. J. (2000). Inequality and growth in a panel of countries. Journal of Economic Growth, 5(1), 5–32.
Barro, R. J. (2013). Health and economic growth. Annals of Economics and Finance, 14(2), 329–366.
Barro, R. J., & Lee, J.-W. (1994). Sources of economic growth. Carnegie–Rochester Conference Series on Public Policy, 40, 1–46.
Barro, R. J., & Sala-i-Martin, X. (2003). Economic growth (2nd ed.). MIT Press.
Bassanini, A., & Scarpetta, S. (2002). Does human capital matter for growth in OECD countries? A pooled mean-group approach. Economics Letters, 74(3), 399–405.
Benhabib, J., & Spiegel, M. M. (1994). Beyond Solow: Human capital, technological change, and the process of development. Journal of Economic Perspectives, 8(1), 105–128.
Bils, M., & Klenow, P. J. (2000). Does schooling cause growth? American Economic Review, 90(5), 1160–1183.
Blau, F. D., & Kahn, L. M. (2005). Do cognitive test scores explain higher U.S. wage inequality? The Review of Economics and Statistics, 87(1), 184–193.
Bloom, D. E., Canning, D., & Sevilla, J. (2004). The effect of health on economic growth: A production function approach. World Development, 32(1), 1–13.
Checchi, D., & van de Werfhorst, H. G. (2014). Educational policies and income inequality. (IZA Discussion Paper Series No. 8222). Institute of Labor Economics (IZA).
Cui, L., Weng, S., & Song, M. (2022). Financial inclusion, renewable energy consumption, and inclusive growth: Cross-country evidence. Energy Efficiency, 15(43).
De Gregorio, J., & Lee, J.-W. (2002). Education and income inequality: New evidence from cross-country data. Review of Income and Wealth, 48(3), 395–416.
Dima, B., & Dima, Ș. M. (2018). Do business regulations promote growth in low-income countries? Economic Analysis, 51(3–4), 33–56.
Donaldson, D., & Weymark, J. A. (1980). A single-parameter generalization of the Gini indices of inequality. Journal of Economic Theory, 22(1), 67–86.
Fernández, C., Ley, E., & Steel, M. F. J. (2001). Benchmark priors for Bayesian model averaging. Journal of Econometrics, 100(2), 381–427.
Goldin, C., & Katz, L. F. (2008). The race between education and technology. Harvard University Press.
Hanushek, E. A., & Kimko, D. D. (2000). Schooling, labor-force quality, and the growth of nations. American Economic Review, 90(5), 1184–1208.
Hanushek, E. A., & Woessmann, L. (2012). Do better schools lead to more growth? Cognitive skills, economic outcomes, and causation. Journal of Economic Growth, 17(4), 267–321.
Hoeting, J. A., Madigan, D., Raftery, A. E., & Volinsky, C. T. (1999). Bayesian model averaging: A tutorial. Statistical Science, 14(4), 382–417.
Ianchovichina, E., & Lundström, S. (2009). Inclusive growth analytics: Framework and application (Policy Research Working Paper No. 4851). World Bank.
IMF. (2025a). Global Debt Database (GDD) [Data set]. International Monetary Fund.
IMF. (2025b). World Economic Outlook (WEO) database [Data set]. International Monetary Fund.
Klasen, S. (2010). Measuring and monitoring inclusive growth: Multiple definitions, open questions, and some constructive proposals (ADB Sustainable Development Working Paper Series No. 12). Asian Development Bank.
Knight, J. B., & Sabot, R. H. (1983). Educational expansion and the Kuznets effect. American Economic Review, 73(5), 1132–1136.
Koop, G. (2003). Bayesian econometrics. John Wiley & Sons.
Ley, E., & Steel, M. F. J. (2009). On the effect of prior assumptions in Bayesian model averaging with applications to growth regression. Journal of Applied Econometrics, 24(4), 651–674.
Lucas, R. E. (1988). On the mechanics of economic development. Journal of Monetary Economics, 22(1), 3–42.
Lustig, N., López-Calva, L. F., & Ortiz-Juarez, E. (2013). Deconstructing the decline in inequality in Latin America (Policy Research Working Paper No. 6552). World Bank.
Madigan, D., & York, J. (1995). Bayesian graphical models for discrete data. International Statistical Review, 63(2), 215–232.
Mankiw, N. G., Romer, D., & Weil, D. N. (1992). A contribution to the empirics of economic growth. The Quarterly Journal of Economics, 107(2), 407–437.
McKinley, T. (2010). Inclusive growth criteria and indicators: An inclusive growth index for diagnosis of country progress (ADB Sustainable Development Working Paper Series No. 14). Asian Development Bank.
Mirestean, A., & Tsangarides, C. G. (2009). Growth determinants revisited (IMF Working Paper No. 09/268). International Monetary Fund.
Moral-Benito, E. (2012). Determinants of economic growth: A Bayesian panel data approach. Review of Economics and Statistics, 94(2), 566–579.
Nedić, V., Turanjanin, D., & Cvetanović, S. (2020). Empirical investigation of the impact of tertiary education on the economic growth of the European Union countries. Economic Analysis, 53(1), 163–178.
Raheem, I. D., Isah, K. O., & Adedeji, A. A. (2018). Inclusive growth, human capital development and natural resource rent in Sub-Saharan Africa: Implications for economic diversification. Economic Change and Restructuring, 51(1), 29–48.
Romer, P. M. (1990). Endogenous technological change. Journal of Political Economy, 98(5), S71–S102.
Szécsi, D., & Szunomár, Á. (2024). PISA score as an inappropriate measure for growth? Empirical evidence from East Asia. Society and Economy, 46(3), 305–321.
Tella, S. A., & Alimi, O. Y. (2016). Determinants of inclusive growth in Africa: Role of health and demographic changes. African Journal of Economic Review, 4(2), 138–146.
Tomić, Z. (2015). Analysis of the impact of public education expenditure on economic growth of European Union and BRICS. Economic Analysis, 48(1–2), 19–38.
United Nations Development Programme. (n.d.). Human Development Reports: Documentation and downloads. HDR Data Center. Retrieved September 19, 2025, from https://hdr.undp.org/data-center/documentation-and-downloads.
Wooldridge, J. M. (2002). Econometric analysis of cross section and panel data. MIT Press.
World Bank. (2025a). Poverty and Inequality Platform (PIP) [Data set]. World Bank Group. https://pip.worldbank.org.
World Bank. (2025b). World Development Indicators (WDI) [Data set]. World Bank Group. https://databank.worldbank.org/source/world-development-indicators.