Social Skill Function and Discounted Labor

This paper introduces a social skill function, grounded in welfare economics, to incorporate the distribution of education within the labor force into the measurement of productive capacity. The central argument is that aggregate output depends not only on average schooling but also on how education is distributed across individuals. When educational attainment is unequally distributed, standard Mincerian human capital measures based on average years of schooling systematically overstate the effective labor input. Building on axioms similar to those of social welfare functions, the paper derives an Atkinson-type inequality index from the proposed social skill function and uses it to construct an inequality-adjusted human capital measure, conceptually parallel to the Inequality-adjusted Human Development Index (IHDI). This leads to a simple and operational rule: human capital, and by extension physical capital used jointly with heterogeneous labor, should be discounted by an education-inequality factor. Failing to do so results in upward-biased factor inputs, a problem that is particularly relevant for less developed economies in cross-country growth and panel regressions. The analysis further establishes a formal link between the Atkinson inequality parameter and the elasticity of substitution in a CES production framework, providing a microfoundation for inequality aversion in terms of complementarity or substitutability among differently educated workers. The proposed framework offers a tractable way to endogenize the technological component of production through the distribution of skills and highlights the macroeconomic cost of educational inequality.