1. GROWTH ECONOMICS and Fund-raising in international cooperation SECS-P01, CFU 9 Economics for Development academic year
9. HUMAN CAPITAL MODELS
Roberto Pasca di Magliano
Fondazione Roma Sapienza-Cooperazione Internazionale

2. Human Capital unsolved questions in the Solow model
The exogenous growth model of Solow shows a number of unresolved questions as follows:
The growth rate of the economy in the steady state is not explained by the model
The preferences of the population (i.e. the propensity to save) do not affect the growth rate of growth and therefore this rate is insensitive to any economic policy
The hypothesis of convergence between countries predicted by the model doesn’t have empirical evidence
Roberto Pasca di Magliano - Human capital

3. Human Capital introduction
The introduction of the role of the Human Capital in the neoclassical growth model is a possible way out of these difficulties
Models based on human capital as “endogenous growth model” was initially proposed by Uzawa (1965) and later taken over by Lucas (1988) and Romer (1992)
We will better analyze later on the endogenous growth model
Roberto Pasca di Magliano - Human capital

4. Human Capital change in Cobb-Douglas function
The typical neo-classical Cobb-Douglas production function would be amended as follows:
Y= T* Kα (qL)β
where:
T*: technical progress, exogenously determined
qL: human capital, in which q represents the changes in production efficiency and its quality
It means that by investing in 'education' workers increase their productivity
Roberto Pasca di Magliano - Human capital

5. Human Capital change in Cobb-Douglas
It is not sufficient to express the production function as a function of human capital improvements, but it is needed to take account of changes in the age composition of the labor:
Δ(qL)/(qL) = ΔL/L + δL - δL ΔE
namely, the improvement of the work is given by:
the growth of physical units ΔL/L
average rate of growth of quality δL
the negative effect of changes on the average - δL ΔE
Roberto Pasca di Magliano - Human capital

6. Human Capital Lucas
Agents and enterprises can accumulate human capital by transferring part of their working time from production to investment in 'education’
Lucas assumes that the increase in human capital is proportional to both the initial stock of human capital and to the time of labor employed in the production process: ΔH = δH(1- u) where u is the fraction of time spent working in the production of the final good Y, and δ is a constant
Roberto Pasca di Magliano - Human capital

7. Human Capital stady-state growth rate
Under these assumptions the steady-state growth rate of per capita income is as follows:
gy = δ (1- u)
It means that the growth rate is equal to the growth rate of the stock of human capital.
Then, growth rate became 'endogenous' in a double sense:
the growth rate is explained by investments in human capital
the growth rate depends on the choice of allocating labor time to produce work or investing in human capital and it is therefore dependent on the preferences of the agents
Roberto Pasca di Magliano - Human capital

8. Human Capital The issue of convergence between different economic systems
The convergence hypothesis was defined by Solow to explain that the growth of both developed and underdeveloped countries will find a similar path in the long run, provided the absence of international restrictions to capital flows
The convergence hypothesis is partially confirmed by authors sustaining the determinant role of the human capital on the growth rate such as Mankiew, Romer and Weil (1992) checking for the role of the human capital, by introducing the rate of investment in human capital among the dependent variables of the equation for estimating the per-capita growth rate This result is known as 'conditional convergence’, i.e. different level of human capital in each country, even if combined with a low stock of physical capital, can have a similar positive effect on growth rate.
Roberto Pasca di Magliano - Human capital

9. Human Capital final question
Although human capital affects growth rate endogenously, there remains the question of causality between human capital and growth:
Does the growth rate of the economy to be influenced by human capital or vice versa?
The estimates cross-section used in the literature on convergence hypothesis identify correlations rather than causal relations
Roberto Pasca di Magliano - Human capital

10. Human Capital Policy implications
By improving human capital investment in education decision-makers can affect the growth rate of per capita of the economy as:
It improves labor productivity
It attracts capital inflows by compensating for lack of domestic capital accumulation
It improves the use technical progress embodied in the production process
Roberto Pasca di Magliano - Human capital