Lessons for the Chancellor #4: When Education Fuels Inequality

(Insights from Onur Özdemir, “Distributional Effects of Human Capital in Advanced Economies: Dynamics of Economic Globalization,” Business and Economics Research Journal, 2020)

---

As Chancellor Rachel Reeves prepares to deliver her second Budget, the political and fiscal stakes could not be higher. Britain’s economic story mirrors that of other advanced nations: record inequality, wage stagnation, and an economy struggling to translate high levels of education into shared prosperity.

A 2020 study by Onur Özdemir offers a striking insight into why this paradox persists — and what policymakers like Reeves can learn from it. Examining 19 advanced economies between 1990 and 2017, the study reveals that at later stages of development, investment in education and human capital can actually widen income inequality.

---

1. The Paradox of Progress: When Education Deepens Inequality

In its early stages, expanding access to education reduces inequality by lifting lower-skilled workers into better-paid roles. But as nations mature, the benefits of education become increasingly concentrated among the already advantaged — those able to afford elite institutions, accumulate networks, and access high-return sectors.

Lesson for the Chancellor:
Boosting education spending alone will not fix inequality. Without reforms to who benefits from education, public investment risks compounding privilege. Britain’s Budget should focus not only on access but on equitable returns to learning — ensuring skills translate into fair wages, social mobility, and regional opportunity.

---

2. Globalisation Magnifies the Divide

Özdemir’s data show that economic globalisation — through trade and financial openness — correlates positively with inequality across advanced economies. High-skilled workers in globalised sectors capture larger income gains, while those in traditional or regional industries fall behind.

Lesson:
Reeves must couple open-market policies with domestic redistribution of opportunity — channeling globalisation dividends into regional innovation hubs, re-skilling programmes, and fair-work protections. Without this, global competition will continue to hollow out Britain’s middle class.

---

3. Growth Without Bargaining Power Is Hollow

The study finds a clear link between weak labour bargaining power and widening income inequality, proxied by unemployment and the erosion of union representation. Where labour’s voice diminishes, capital captures the gains of productivity.

Lesson:
Reform labour policy to strengthen workers’ voice in corporate governance and pay-setting. Fiscal growth plans must embed structural trust between labour and capital — rewarding companies that share productivity gains through employee ownership, profit-sharing, and collective representation.

---

4. The Kuznets Curve Reversed

Historically, economist Simon Kuznets proposed that inequality rises in early development and falls as societies grow richer. But Özdemir’s analysis shows a U-shaped curve — inequality falls initially, then rises again once economies reach high-income status.

Lesson:
Britain, now a mature economy, cannot rely on “growth first, redistribution later.” Reeves’ second Budget should integrate equity into the engine of growth itself — aligning industrial strategy, education, and fiscal policy to prevent the rebound effect of prosperity concentrating at the top.

---

5. The New Divide: Returns to Skills, Not Access to Skills

The research highlights that returns to education are not evenly distributed. The highly educated in globalised, technology-intensive roles reap exponential income gains, while others face stagnating wages despite similar years of schooling.

Lesson:
Reeves should move beyond education quantity targets (e.g., “X million apprenticeships”) toward quality and wage parity — linking tax incentives and funding to employer commitments on fair pay for skilled work.

---

6. Human Development Alone Is Not Enough

Even when measured through broader indices like the Human Development Index (HDI), which combines income, life expectancy, and education, the study still finds a positive correlation between human development and income inequality at later stages.

Lesson:
The UK’s social policy should focus on distributional design — who captures the benefits of progress — rather than assuming that better averages mean a fairer society. Health, education, and productivity policies must be deliberately progressive, targeting areas of persistent disadvantage.

---

7. A New Human Capital Covenant

Özdemir concludes that, in advanced economies, the benefits of human capital and globalisation accrue disproportionately to those already advantaged, unless policy directly addresses distributional outcomes.

Lesson:
Reeves’ second Budget presents an opportunity to declare a Human Capital Covenant — a pledge to ensure every pound invested in education, innovation, or infrastructure contributes to narrowing, not widening, inequality. This could include:

• Regional equity audits for major capital spending.
• Mandatory fair-pay ratios for public contracts.
• Tax credits tied to inclusive training and upskilling.

---

In Summary: Shared Prosperity Is a Choice

“In the early stages, education narrows inequality. In the later stages, it entrenches it — unless governments intervene deliberately.” — Özdemir (2020)D

For the Chancellor, the message is clear:
Britain’s challenge is not a lack of talent or effort, but a system that rewards concentration over contribution.
A Budget for Shared Prosperity would measure success not by GDP alone, but by how evenly the gains of growth are distributed — through education, wages, and wellbeing.

The next stage of economic maturity will not be defined by how much Britain learns, but by how fairly it shares what it knows.