Human Capital

Summary

Assumptions

  1. Human capital (like physical capital) has five key characteristics 1. it's productive, 2. it's produced (e.g. education) 3. human capital earns a return (but only for working) 4. depreciates
  2. Health and gdp/capita are both endogenous variables of each other.
  3. Human capital is 'installed' in owner whereas physical capital exists independently of owner.

Model/Theory

Human capital can be modelled as:

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  1. Health - people who couldn't work can work and those who could work before can work harder. Exogenous shifts in non-health related GDP/capita or non-GDP/capita related health  shift the curves.
  2. Education - Change Cobb-Douglas production function such that Y=AK^α(hL)^(1-α) where h is related to schooling. Where yss=h[A^(1/1-α)(γ/(n+𝛿))^(α/(1-α)) i.e. steady state income/capita is directly related to labour input per worker (h). Thus comparing countries, ceterus paribus, differences in y will be proportional to differences in h.

 

Predictions

Evidence

  1. Health - Improved nutrition estimated to have a 0.3% effect in UK compared to 1.13 total economic growth. 
  2. Education -  incl. opportunity cost investment in human capital is ~= investment in physical capital (about 12% of GDP in US). College premium (despite declining a bit in the 1970s) has shot up massively - two explanations 1. globalization made education a premium again 2. technological change is skill-biased. Regarding steady state analysis the variations in schooling explains some but not all of the variation in gdp/capita (see page 193).

Evaluation

  • Health - Health view vs Income view: former argues that health is the key problem and if that is solved income will rise, the latter that income is the key problem and if that is solved that health will rise.
  • Education - The reason Cobb-Douglas is better with α of 2/3 rather than 1/3 (which is the observed amount of physical capital) is that there is a return to human capital as well). Other factors that matter include quality of schooling - not just length.
  • Externalities - human capital has positive externalities that physical capital doesn't have - which made lead to an underinvestment on a purely private basis.