Human Capital Economic Growth David Weil Chapter 6 Prepared by Ali Güneş, Zirve University

Human Capital Give a man a fish and you feed him for a day Teach a man to fish and you feed him for a lifetime. __Chinese proverb

Human Capital (HC) A worker can be weak or strong, ill or healthy, ignorant or educated. Smart or tireless workers are able to earn higher wages. Differences in the quality of workers are one explanation for differences in income among countries.

Properties of HC Human capital shares several important properties with physical capital Focus on the qualities that are produced Focus on qualities of people that are productive Human capital earns a return as well Human capital depreciates

HC in the form of Health Health is something that people value for itself But health also has a productive side: Healthier people can work harder and longer, they can also think more clearly. Healthier students can learn better. Hence, better health in a country will raise its level of income

Some data Average doctors per thousand people 2.2 in OECD 0.8 in developing countries 0.3 in sub-Saharan Africa

Health and Income Raising income in a given country will improve its level of health Improving health in a country will raise its level of income

HC in the form of Education People work with their minds as well as their bodies In developed economies, intellectual ability is far more important than physical ability in determining a person’s wage

Some data… Average years of schooling in 1975: 3.2 in developing countries 8.0 in advanced countries 11.4 in USA Average years of schooling in 2010: 6.7 in developing countries 11.0 in advanced countries 12.4 in USA

Value of education Return to education: Increase in wage that a worker would receive if he or she had one more year of schooling College premium: the ratio of the wages of workers with college education to those with a high-school degree

Some data… Wage relative to no schooling: No schooling 1.00 Primary incomplete 1.65 Primary complete 2.43 Secondary incomplete 2.77 Secondary complete 3.16 Higher incomplete 3.61 Higher education 4.11

Some calculation… Wages are 2/3 of national income Share of wages paid to human capital 59% in developing countries 68% in advanced countries Human capital’s share of national income 40% in developing countries 45% in advanced countries

Labor augmenting production Y = AK α (hL) 1-α A: measure of productivity K: capital L: number of workers h: the amount of labor input per worker hL: total labor input

Steady state Y = h 1-α AK α L 1-α In per capita terms y = h 1-α Ak α Therefore k ss = (σh 1-α A/(δ+n)) 1/(1-α) = h(σA/(δ+n)) 1/(1-α) y ss = hA 1/(1-α) (σ/(δ+n)) α/(1-α)

Countries i and j with same A, σ, δ, n, α but with different h y ss i / y ss j = h i / h j Schooling differences lead to differences in labor input which lead to differences in income.