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Copyright 2009 Pearson Education, Inc. Publishing as Pearson
Addison-Wesley
Chapter 6
HUMAN
CAPITAL
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Human capital
So far, labor is the OTHER factor of production(other than
K)
Yet not all workers are of equal quality
Healthy and unhealthy
Educated and not educated
The human input to production may be seen as a type
of capital (HUMAN CAPITAL)Human capital HKcomes in two main
types:
health and education
3-2
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Human capital is capital
HK shares many features of physical capital
Human capital may be productive
Human capital is itself produced through the process of
education and trainingNot a natural resource
Human capital earns a rate of return, which motivates
itsproduction Educated or healthier worker earns higher wage
Good-looking workers earn 12% higher wage than less good-looking
workers
Human capital also wears out
3-3
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6-4
Human capital is positively correlated
with Gdp per capita
1. Nutrition versus GDP per Capita
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6-5
Human capital is positively correlated with Gdp
per capita
2. Life Expectancy Versus GDP per Capita
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6-6
Human capital is positively correlated with Gdp per
capita
3. Average Years of Schooling Versus GDP per
Capita
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HK and per-capita Gdp: what is
causing what?
Is economic development (that is: higher per-capita
Gdp) that feeds into higher health and education
Or rather are well-fed and well-educated workers to bemore
productive and raise per-capita Gdp?
Who knows? Problem solved with statistical methods
3-7
Human capital
Per-capita Gdp
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The rate of return to education
Problem in computing economic return to education:HK is embodied
in each person
Idea
Educated people typically earn a higher market wagecompared to
people with no education
Premium varies with amount and quality of
education Take total number of schooling years as a proxy
Doesnt account for different quality of schooling
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These are average values for rich and poor countries 6-9
Returns to schooling are diminishing --
13.4% on primary education 10.1% on low
secondary 6.8% for higher secondary and tertiary
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How to compute the rate of return
(r.o.r) to education
What is the r.o.r. to the first year of schooling?
13.4%, that is a person who has gone to school for oneyear will
earn 1.134 times the salary of a person with no
schoolingHow about two years of schooling (with respect to
no-
schooling)?
W2 = 1.1342 W0 = 1.29
W0
How about five years of schooling (wrt no-schooling)?
W5 = (1.1344 x 1.101) W0 = 1.82
W0
The educational premium to 5 years of schooling is 82%
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In the U.S. the educational premium has gone up a lot over
time. This is true for the rest of the world as well 6-11
Ratio of Tertiary Wages to High-
School Wages
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How much of the cross-country income
gaps is explained by education?
We have pinpointed big differences in countries
levels of HK
Now want to understand the extent to which suchdifferences
translate into differences in income
per capita across countries
We just focus on schooling (and not on training orother informal
ways of accumulating HK)
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6-13
Quantitative implications of
Y = Ak(hL)1-= (h1-A) KL1-
Formula (6.1) answers the question: What would it be
the income gap between country i and j when the
two countries exhibit identical A, n and ?
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Example
Problem: In countryj number of years of schooling
is two; in country i it is 12.
Compute the income gap in the steady state hj = 1.134
2 x h0 = 1.29 xh0
hi = 1.1344 x 1.1014 x1.0684 x h0 = 3.16 x
h0
Hence:
yiss/yj
ss = hi/h j = 3.16 / 1.29 = 2.47
3-14
M t ti ll di t d
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Copyright 2009 Pearson Education, Inc. Publishing as Pearson
Addison-Wesley 6-15
More systematically: predicted versus
Actual GDP per Worker using
schooling years
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What is left out of our model
Quality of schooling
Externalities
3-16
