Rates of return to education and income distribution

Summary This paper examines the relationship between rate of return to education and income distribution with the help of cross-nation data on 30 developing and developed countries. The results indicate that the higher income groups in the society benefit the higher the rate of return to any level of education, and the bottom 40 percent and the middle 40 percent income groups lose; and the disadvantage for the poor income groups is the least at the primary level of education. As higher rates of return to education suggest higher levels of income inequalities, rapid expansion of the education system may reduce income inequalities through decline in rates of return to education. Secondly, it is also argued here that since high income groups benefit from all levels of education, education investments targeted specifically towards the poor may be preferred to overall investment in education.The author is Consultant, the World Bank, Washington D.C., 20433 (USA), while on leave from the National Institute of Educational Planning and Administration, New Delhi. The incisive comments of George Psacharopoulos, Rati Ram, and the Editor(s) of this Journal on earlier versions of this study are gratefully acknowledged. However, the views expressed here and the errors that remain are the responsibility of the author alone and should not necessarily be attributed to anyone else, including the World Bank.