Governance, Risks, and Returns to Human Capital

Abstract

This study examines the role of good governance, ethnic diversity, and exposure to environmental risks on the returns to human capital. To estimate country-level returns to education and experience, the analysis uses labor force and household surveys spanning 33 years and from 145 countries at various stages of economic development. The findings indicate that better governance and greater ethnic diversity are associated with both higher returns to human capital and lower overall income inequality, with narrower wage gaps between men and women. Both urban and rural residents benefit similarly from stronger institutions. Quantile regressions also reveal that stronger socioeconomic institutions help lift incomes at the bottom of the distribution relative to the top, leading to lower overall inequality in well-governed and more diverse countries.