Lessons for the Chancellor #3: Why Equality in Education Is the Key to Growth

(Insights from Amparo Castelló & Rafael Doménech, “Human Capital Inequality and Economic Growth,” The Economic Journal, 2002)

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As Chancellor Rachel Reeves prepares to deliver her second Budget, she faces the most difficult balancing act of her career: restoring growth while managing an ageing population, a strained welfare system, and persistent inequality.
But a landmark study by Castelló and Doménech reminds us of a simple truth — it’s not just how much education a nation has, but how evenly that education is shared.

Their 40-year, 108-country analysis reveals that inequality in human capital — the unequal distribution of education and skills — is a stronger drag on economic growth than inequality of income itself. The findings carry profound lessons for any government seeking to rebuild prosperity in a post-austerity, post-pandemic Britain.

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1. Growth Depends on Education Equality, Not Just Quantity

The study’s central finding is stark:

Countries that began the 1960s with high inequality in education grew significantly slower than those with more equal access to learning.

Even nations with similar average years of schooling performed differently depending on how education was distributed. For instance, India and Indonesia had nearly identical averages (around 3.6 years of formal education), yet Indonesia’s more even spread of learning delivered far faster growth — a pattern still visible today (see Fig. 1, p. 6 of the paper).

Lesson for the Chancellor:
Britain’s path to higher productivity lies not merely in funding schools or universities, but in closing the distribution gap — ensuring that every region, class, and generation can access quality education and retraining throughout life.

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2. Inequality in Education Suppresses Investment

The study found that nations with wider gaps in education suffered from lower rates of investment — both human and financial.
When fewer people can participate in skilled labour, innovation and enterprise stagnate, leading to weaker returns on capital.

Lesson:
Fiscal policy should treat education equality as an investment accelerator. Expanding vocational training, reskilling, and lifelong learning access in disadvantaged regions can unlock private investment by boosting both confidence and competence in the workforce.

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3. Redistributing Knowledge Is More Effective Than Redistributing Income

While previous economists like Kuznets focused on income inequality, Castelló and Doménech proved that human capital inequality correlates more robustly and negatively with growth than income inequality does.
In other words, giving people skills and opportunity produces more sustainable prosperity than giving them short-term cash transfers.

Lesson:
The Chancellor should reframe social policy from welfare redistribution to capability redistribution. Instead of treating education and training as “current spending,” classify them as capital formation — the same as roads, ports, or digital networks.

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4. Reducing Educational Gaps Strengthens Social Stability

The study confirms that nations with more equitable education also experience greater political stability and social cohesion. By contrast, countries with entrenched educational divides face structural barriers to opportunity, leading to populism, stagnation, and unrest.

Lesson:
Policies that equalise access to education are not just economically prudent — they are nation-building tools. A “Levelling Up through Learning” agenda could bind together the Chancellor’s growth and inclusion goals, uniting fiscal realism with social justice.

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5. Convergence Is Possible — If Policy Is Consistent

Between 1960 and 2000, most nations reduced educational inequality, and those that did enjoyed faster growth and higher wellbeing. The paper’s convergence chart (Fig. 4, p. 9) shows developing nations catching up as they spread education more evenly — while some advanced economies, including parts of the OECD, lost ground by allowing inequality to widen.

Lesson:
Britain cannot afford to rest on its laurels. The widening attainment gaps between London and the North, or between private and state schools, are not merely moral failings — they are growth-killers. Long-term prosperity requires closing these divides with the same urgency given to fiscal consolidation.

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6. Equality in Human Capital Spurs Private Enterprise

The study shows that broadly distributed education leads to higher private investment and innovation, since more people can effectively use technology, manage businesses, and engage in skilled work.
In effect, education equality crowds in private capital by raising the nation’s collective return on investment.

Lesson:
The Chancellor’s Budget should view human capital as an economic multiplier. Incentivise firms to train workers, co-fund apprenticeships, and reward employee ownership schemes that spread knowledge and stakeholding across the workforce.

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7. Policy Must Focus on Inclusion, Not Just Excellence

Perhaps the most politically relevant finding is that growth is maximised when everyone learns — not just the elite. Education concentrated among a small group yields diminishing returns, while a broad base of educated citizens drives innovation, productivity, and democratic resilience.

Lesson:
Shift the narrative from “world-class universities” to “world-class access.” The Budget should prioritise early-years investment, adult learning, and regional retraining centres over elite expansion or prestige projects.

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In Summary: A Human Capital Covenant

The evidence from Castelló and Doménech could not be clearer:

Inequality in education is more corrosive to growth than inequality in income. Societies that distribute learning widely grow faster, invest more, and remain more stable.

For Chancellor Reeves, the message is simple and profound.
A credible growth strategy cannot be built on fiscal discipline alone — it must rest on a new Human Capital Covenant, committing Britain to spread knowledge, skills, and opportunity as deliberately as it once spread roads and railways.

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The future of Britain’s economy won’t be written in spreadsheets, but in classrooms, workshops, and lifelong learning hubs.
The more equal our education, the stronger our growth — and the fairer our society.