Human capital and labor income in Ecuador: a regional approach using instrumental variables

Abstract

The objective of the present study is to examine the effect of human capital on the salary using data from the Living Conditions Survey (LCS). In order to correct the endogeneity between human capital and wages, we use regressions with instrumental variables, where the instrument of workers ‘human capital is the parents’ schooling. We also apply a regional approach to capture territorial heterogeneity among the provinces of the country. The results show that the poorest regions of the country are those whose provinces have lower levels of human capital and vice versa. To capture other labor force endowments, we include a set of control variables such as ethnicity, sex, and geographic area. An economic policy implication based on this study is based on investment and quality control education would increase the income of workers, which reduces poverty and inequality in the country.