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INCOME INEQUALITY AND PRODUCTIVITY GROWTH IN NIGERIA: Does Human Capital Development Matter?

INCOME INEQUALITY AND PRODUCTIVITY GROWTH IN NIGERIA: Does Human Capital Development Matter?

 

Abstract: This study examines the relationship between productivity growth and income inequality in Nigeria, using human capital as a dynamic linkage factor. A simultaneous equations framework is employed to investigate the relationships based on aggregate economy-wide data covering the period 1980 – 2012. The Generalized Method of Moments (GMM) technique is used for the estimation. Results from the study show that productivity growth clearly leads to reduced income inequality in Nigeria, but income inequality has a positive impact on productivity growth. The positive relationship is linked to the indirect effects of inequality on growth through the human capital channel. The results also confirm that income inequality can be reduced through higher human capital development, especially education, which in turn has a positive impact on productivity growth. If individuals are driven to acquire more education as a result of high income disparity among households, the resulting overall effect would be to increase productivity. Thus, human capital development is shown to be a critical linkage factor in the relationship between income inequality and productivity growth in Nigeria.

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