Abstract:
The article investigates how human capital investment affects distribution of wealth in short as well as well long term in various economies. The article reflect current credit market pattern and individual investment in gaining competencies and knowledge to perform labor which impact wealth distribution. The article further investigates per capita output differences in various countries and also examines differences in various countries economic to adjust variation in earnings distribution and wealth.
Introduction:
The Article “Income Distribution and Microeconomics” by Oded Galor and Joseph Zeira provides a detailed explanation on how distribution of wealth influence economic activities in short term and long term. Article provides detailed explanations on growth pattern of different countries are not similar. Writers establish co-relation among distribution of income and per-capita income. They suggest that wealthier countries have more equal distribution of wealth. The article also describes various phases of economic development, where experts relate distribution with demand, economic growth, consumption, saving and the like. After various analysis Authors formed two hypotheses: fist hypothesis is deficient credit markets, since the rate of interest for lenders is lower than individual borrowers. Second hypothesis is human capital investment cannot be stopped or separated because of technology in non-linear.
Discussion: To analyze their hypothesis Authors explored and mentioned seven points in the article.
The Basic Model: in this model authors describes how goods can be produced in open economy: by skilled people and funds or only by un-skilled labor. All people see two generation one in the form of their parents and other in the form of own kids. During first phase if they invest capital in gaining knowledge and study, in second phase they are skilled persons .
Distribution of wealth and short term equilibrium: Author mentions that individual borrowing rate of interest is always higher than lenders rate because they have to cover their rate and cost involved in tracking the customer in order to avoid defaulters. Interest rate is an independent variable and does not vary according to the amount of borrowing. Individual with low inherit amount does not invest in education because they have to pay back higher amount due to high rate of interest. This ultimately impacts the equilibrium.
The dynamics of distribution of wealth: individual with less than some specific inherit amount may invest to get some skilled but their future generations will not. On the other hand individuals with higher than specified amount invest on human capital so as their future generations. Rich people get richer and skilled whereas poor are unskilled.
Discussion on Hypothesis: Authors mentions that the result formed by above analysis remain same even if there is variation in wages of skilled and unskilled labors.
Variable wages: to make their hypothesis more strong and relevant analyst applied variable wages on basic model. It helped in establishing a relation between capital and equality. The wages of unqualified labors depends upon their supply in the market and number of people who are spending on learning skills; hence equilibrium is related with the inherent money.
Distribution of wealth and income of country: in a developed economy inherent money with individual is higher than developing or undeveloped nations. In developing or undeveloped country the supply of unqualified people is high hence the wage is low; on the other hand in developed countries the wage of unskilled is higher because of less supply. Income of unqualified people contributes to income of country.
Exogenous Shocks: in developed country the shock reduces the demand of unqualified labor which resulted in no change in wages whereas in developing countries it reduces the wage rate of unqualified people.
Conclusion:
After having observed the abovementioned analysis of the study, it is good to conclude the discussion saying that the study provides a complete analysis on the distributions of wealth and income with a macroeconomic approach .
Works Cited
William Boyes and Michael Melvin. Microeconomics. Stamford, Connecticut: Cengage Learning, 2010.
François Bourguignon, Francisco H. G. Ferreira and Nora Lustig. The Microeconomics of Income Distribution Dynamics in East Asia and Latin America. New York: Oxford University Press, 2005.
Oded Galor and Joseph Zeira. "Income Distribution and Macroeconomic." The Review of Economic Studies (1993): 35-52.
Tucker, Irvin B. Microeconomics for Today. Stamford, Connecticut: Cengage Learning, 2010.
