James J. Heckman and Alan B. Krueger, Inequality in America: What Role for Human Capital Policies?

James J. Heckman and Alan B. Krueger, Inequality in America: What Role for Human Capital Policies? Cambridge, MA: MIT Press, 2004. $40.00 cloth.

Income inequality has increased substantially during the last three decades, reversing the trend toward more equal incomes that characterized much of the twentieth century. According to the introduction to this book, since 1974, the share of income going to families in the top fifth of the income distribution has increased from 41 to 48 percent, while the share going to the bottom fifth has declined from 6 to 4 percent. Much of this increase in inequality may be attributed to a growing wage gap between highly-educated and less-educated individuals. Those with the most education have seen their incomes increase, while the incomes of those with less education have stagnated or even declined. These patterns lead to the central question of the book reviewed here: If differences in education and skills (human capital) contribute substantially to inequality, what can and should the government do to promote human capital?

The book includes papers and discussions presented at the third Alvin Hansen Symposium on Public Policy, sponsored by the economics department at Harvard University. The first two chapters consist of invited papers, one by Alan Krueger and one by Pedro Carneiro and James Heckman. These economists are well-known for their work on the economics of education, and these chapters are the heart of the book. The third chapter consists of comments on the Krueger and Carneiro/Heckman papers by five other distinguished economists. The last two chapters consist of responses and rejoinders by Krueger and Carneiro/Heckman.

Both the Krueger and Carneiro/Heckman chapters are grounded in economic theory, and both marshal a wealth of empirical evidence to support their arguments about what policies are likely and unlikely to increase human capital for those in the lower half of this distribution. Both give attention to non-cognitive skills such as persistence, reliability, and motivation, as well as cognitive skills.

The areas of disagreement between the two papers are large, however. Krueger asserts that there is too much inequality in the U.S. economy and argues that the government should increase investments in a broad range of existing programs. For example, he calls for full funding of Head Start, smaller K-12 classes, and greater funding for vocational training. Krueger is also in favor of allocating disproportionately more resources to programs that serve disadvantaged individuals in order to reduce inequality.

The recommendations offered by Carneiro and Heckman place less emphasis on reducing inequality and more on efficiency. These scholars argue that investments should be targeted toward young children and away from less-skilled adults. Citing evidence that cognitive and non-cognitive deficits appear early in life, they argue that human capital policy should focus on families, not just schools. And, they emphasize the need for policy evaluations to account for a full range of costs, including the efficiency costs associated with taxation and the loss of programs that could have been funded in the absence of chosen human capital programs.

When these very different recommendations are combined with the response and counter-response structure of the book, the text takes on the flavor of an intellectual debate. This characteristic is both strength and weakness. Many readers will find it stimulating to be in the company of such bright minds who attack an important question with intellectual rigor. In the end, however, the debate seems to somewhat overshadow the policy questions. Finding the answers to the book's central question, "what role for human capital policy?" may require a second and even third reading. And different readers will likely formulate different answers. In other words, this book offers no simple five-step formula for increasing skills and reducing inequality. This is the murky reality of policy, however, where decisions require value judgments and different conclusions are inevitable. For readers who are familiar with economic terminology and who are interested in weighing opposing arguments and even grappling with value questions involving trade-offs between efficiency and equity, this book will stimulate thinking about policies to improve education and skill levels.

Sondra Beverly

University of Kansas