Proceedings of the 5th International Ph.D. School on Innovation and Economic Development, Globelics Academy 2008, Tampere, 2nd of June 13th of June, 2008.Education and skill of employees have an economic value for firms and for the economy as a whole.  Main question: does growth primarily driven by ‘human capital accumulation’ or ‘stock of human capital’ (Lucas Vs. Nelson & Phelps). I Policy implications differ according to each approach

Azomahou, Théophile T.

Scholarly Materials And Research @ Georgia Tech

Human capital and growthThéophile T. AzomahouUNU-MERIT, Maastricht UniversityGlobelics Academy 2008Tampere, FinlandThéophile T. Azomahou (UNU-MERIT) 03.06.2008 1 / 23Set up Human capital: why is so important?Set upWhat means human capital?Pioneering work of Becker (1964), Nelson & Phelps (1966), Lucas(1988).Human capital: central concept to the economic analysis (growth anddevelopment) and for policy makers.Human capital: productive attributes of people in some economiccontext (educational attainment, skill, training ...) but also health,migrations (brain-drain), etc.Human capital does affect growth through numerous channels. But, in anknowledge-based economy, technological progress is an important channelto create and absorb new technologies (R&D and innovation).Théophile T. Azomahou (UNU-MERIT) 03.06.2008 2 / 23Set up Human capital: why is so important?Set upInvestments in human capitalInvestment in education and learning by doing:I Education and skill of employees have an economic value for firms andfor the economy as a whole.I Main question: does growth primarily driven by ‘human capitalaccumulation’ or ‘stock of human capital’ (Lucas Vs. Nelson &Phelps).I Policy implications differ according to each approach.Investment in health (health expenditures):“ . . . decline in the death is an indispensable prerequisite for moderneconomic growth” (Kuznets, 1973).Migration: ‘brain-drain’.Théophile T. Azomahou (UNU-MERIT) 03.06.2008 3 / 23Set up Human capital: why is so important?Set upWhy is so important: The EU policy contextTitle VIII of the Amsterdam Treaty: UE countries should promote askilled and adaptable workforce.The Lisbon strategy (march 2000): EU Leaders committed the EU tobecome by 2010 “the most dynamic and competitive knowledge-basedeconomy”.The Lisbon strategy revised (2005): strong emphasis on the need toinvest more in human capital and R&D. Indeed, the observed slowproductivity progress is due to the low investment in R&D and highereducation.Théophile T. Azomahou (UNU-MERIT) 03.06.2008 4 / 23Set up Human capital: why is so important?Set upWhy is so important: The EU policy contextExpenditures on education as a % of GDP in tertiary education in 2003:United-States Vs. European-Union 2502.87 US  EU25Théophile T. Azomahou (UNU-MERIT) 03.06.2008 5 / 23Set up Human capital: why is so important?Set upWhy is so important: The EU policy contextR&D expenditures as a % of GDP in 2004:United-States Vs. European-Union 2502.66 US  EU25Théophile T. Azomahou (UNU-MERIT) 03.06.2008 6 / 23Summary of talkOutline of the presentation1 Set up2 The puzzle of human capital3 Education: ‘accumulation’ Vs. ‘stock’ of human capital4 Human capital, R&D and technology diffusion5 An introspection to health: the case of life expectancy6 Some policy implicationsThéophile T. Azomahou (UNU-MERIT) 03.06.2008 7 / 23The puzzle of human capitalThe puzzle of human capitalMicro Vs. Macro empiricsBenhabib & Spiegel (1994): hard task to find a robust empiricalrelationship between educational attainment and long-run economicgrowth.I Barro (2001): 0.0000 point estimate for the effect on growth of maleupper school.I Islam (1995): “ · · · such ‘anomalous’ results are not new. Wheneverresearchers have attempted to incorporate the temporal dimension ofhuman capital variables into growth regressions, outcomes of eitherstatistical insignificance or negative sign have surfaced”.Microeconomic evidence would imply the opposite (Becker, 1964;Hanushek, 1986; etc).Question: where has all the education gone? (Pritchett, 2001)Théophile T. Azomahou (UNU-MERIT) 03.06.2008 8 / 23The puzzle of human capitalThe puzzle of human capitalReasons of the puzzleHuman capital is not usually exchanged in markets like other economicgoods.Measurements of human capital:I Indirect measure: educational attainments and/or enrolment rates.I Human capital indicators might not be very comparable at thecross-country level given the wide variety of educational systemsaround the world.de la Fuente & Doménech (2002); Cuaresma and Lutz (2008, IIASA)have partly addressed the data quality issue.Théophile T. Azomahou (UNU-MERIT) 03.06.2008 9 / 23Education: ‘accumulation’ Vs. ‘stock’ of human capitalEducation: ‘accumulation’ Vs. ‘stock’ of human capital1. Human capital as ‘accumulation’ (Lucas): neoclassical approachI Differences in growth rates across countries are mainly due todifferences in the rates at which those countries accumulate humancapital over time.I Policy issues: should education be funded locally (privately) ornationally, ii) can education policies promote economic development?2. Human capital as ‘stock’ (Nelson & Phelps): endogenous growthI Describes growth as being driven by the stock of human capital whichin turn affect a country’s ability to innovate and catch up with moreadvanced countries.I Policy issues: i) should governments emphasize primary/secondary orhigher education, ii) should governments subsidize formal education Vs.on-the-job training, iii) should educational policy be elitist or broadlybased.Théophile T. Azomahou (UNU-MERIT) 03.06.2008 10 / 23Education: ‘accumulation’ Vs. ‘stock’ of human capitalEducation: ‘accumulation’ Vs. ‘stock’ of human capitalThe standard approach: accumulation of human capitalHuman capital as ‘accumulation’:I Human capital is an ordinary input in the production process, alongwith physical capital.I Skilled workers are more productive than non-skilled workers whateverthe technology.Implications:I Such growth is nevertheless transitional because of decreasing returnsto capital.I ... then, to sustain growth, it is necessary to keep on accumulatinghuman capital.Théophile T. Azomahou (UNU-MERIT) 03.06.2008 11 / 23Education: ‘accumulation’ Vs. ‘stock’ of human capitalEducation: ‘accumulation’ Vs. ‘stock’ of human capitalEmpirical evidence (cont’d)Barro & Sala-i-Martin (1995)I An extra year of higher level schooling (for males aged 25 and over)raises the growth rate on impact by 1.2% per year for countries alltaken together.I A 1.5% increase of the ratio of public education spending to GDP(during the period 1965-1975) would have raised the average growthrate during the same period by 0.3% per year.I ‘a 2% per capita growth rate seems to be about as good as it gets inthe long run for a country that is already rich’.Théophile T. Azomahou (UNU-MERIT) 03.06.2008 12 / 23Education: ‘accumulation’ Vs. ‘stock’ of human capitalEducation: ‘accumulation’ Vs. ‘stock’ of human capitalEmpirical evidenceBenhabib & Spiegel (1994)I Past education attainment (as a measure of the current stock ofhuman capital) remains uncorrelated with growth if human capital isjust an ordinary input in the aggregated production process.I The effect of past education attainment levels on current growth ratesbecomes significant in the Nelson and Phelps approach.Assumptions behind the findingsI Growth is positively affected by the rate of technological innovationsand by the rate of adoption of existing innovations.I The stock of human capital affects both these rates. Although thecorrelation coefficient is essentially zero (or even negative) in the formercase, it becomes positively significant (about 1.2) in the latter case.These findings support the alternative approach: human capital as primarysource of innovations.Théophile T. Azomahou (UNU-MERIT) 03.06.2008 13 / 23Human capital, R&D and technology diffusionHuman capital, R&D and technology diffusionHuman capital as primary source of innovations.The alternative approach: testable predictionsProductivity growth and the rate of innovations should increase withthe level of education attainment.I Evidence: significant impact of the level of secondary and highereducation attainment on the growth rate of productivity (see Barro &Sala-i-Martin, Benhabib & Spiegel).The marginal productivity of education attainment increases with therate of technological progress.I Complementarity between education and R&D activities (Bartel &Lichtenberg, 1987).Education as a vector for technological catch-up via innovation.I Evidence: effect of past educational attainment levels on currentgrowth.Théophile T. Azomahou (UNU-MERIT) 03.06.2008 14 / 23Human capital, R&D and technology diffusionHuman capital, R&D and technology diffusionExample: technology frontier, labor productivity and growth (Azomahou & Diene)Labor productivity backwardness andschool enrollment rate in highereducation.Higher education13.8 70.3−4.256441.64361Labor productivity backwardness and theshare of R&D expenditure in % of grossdomestic expenditure on R&D as a % ofGDP funded by industries.Industry expenditure0 77.43−2.09332.47956Théophile T. Azomahou (UNU-MERIT) 03.06.2008 15 / 23An introspection to health: the case of life expectancyAn introspection to healthExample: The relationship between life expectancy and economic growth (Azomahou,Boucekkine, Diene)Armatya Sen (1998): ‘... the forces that contribute to an increase or areduction of mortality often have economic causes’.Life expectancy in a country is a broad measure of population health.Health expendituresI Most of developed countries spent a rising share of total economicresources on health and enjoyed substantially longer lives.I World Bank (1998): life expectancy displays a strong tendency toimprove with per capita income (feedback effect).I Ben-Porath mechanism: increasing life expectancy leads people tolengthen schooling time, and then to become more productive.Théophile T. Azomahou (UNU-MERIT) 03.06.2008 16 / 23An introspection to health: the case of life expectancyLife expectancy and economic growthAzomahou, Boucekkine, Diene (forthcoming)Co-evolution of GDP per capita and life expectancy at birth: USYear GDP per capita (1/1000)  Life expectancy at birth1820 1860 1918 1945 20051.2571977.87Théophile T. Azomahou (UNU-MERIT) 03.06.2008 17 / 23An introspection to health: the case of life expectancyLife expectancy and economic growthAzomahou, Boucekkine, Diene (forthcoming)Co-evolution of GDP per capita and life expectancy at birth: United KingdomYear GDP per capita (1/1000)  Life expectancy at birth1820 1860 1918 1945 20051.7059278.73Théophile T. Azomahou (UNU-MERIT) 03.06.2008 18 / 23An introspection to health: the case of life expectancyLife expectancy and economic growthAzomahou, Boucekkine, Diene (forthcoming)Co-evolution of GDP per capita and life expectancy at birth: FranceYear GDP per capita (1/1000)  Life expectancy at birth1820 1860 1918 1945 20051.1349880.5Théophile T. Azomahou (UNU-MERIT) 03.06.2008 19 / 23An introspection to health: the case of life expectancyLife expectancy and economic growthAzomahou, Boucekkine, Diene (forthcoming)Co-evolution of GDP per capita and life expectancy at birth: SweedenYear GDP per capita (1/1000)  Life expectancy at birth1820 1860 1918 1945 20051.1097180.75Théophile T. Azomahou (UNU-MERIT) 03.06.2008 20 / 23An introspection to health: the case of life expectancyAn introspection to health: The relationship between lifeexpectancy and economic growthGrowth engine: human capital accumulationI A higher life expectancy is likely to lengthen the schooling time, thusinducing a better education and better conditions for economicdevelopment.I ... but at the same time, the fraction of people who did their schoolinga long time ago will rise, implying a negative effect on growth, whichmay be even worse if we account for voluntary retirement.I Overall, the effect of increasing longevity on growth is ambiguous, andmuch less simple than the common view.Théophile T. Azomahou (UNU-MERIT) 03.06.2008 21 / 23An introspection to health: the case of life expectancyLife expectancy and economic growthAzomahou, Boucekkine, Diene (forthcoming)Theory:hump-shaped relationship(human capital accumulation engine)Life expectancy13.3929 60.006029.026202New empirical evidence:convex-concave relationship(age-dependent mortality accounted for).Life expectancy at birth32.47 82.06−.148388.112166Théophile T. Azomahou (UNU-MERIT) 03.06.2008 22 / 23Some policy implicationsSome policy implications1. Life expectancy and economic growth:I Because people with different ages have different lifetimes, they willhave different effective planning horizons, and notably different savingdecisions.I Is the growth of health spending a rational response to changingeconomic conditions, notably the growth of income per person? (Hall& Jones, 2007)2. Macrofoundations of education policy:I Governments will increase the average level of education, not onlydirectly through education policy, but also indirectly by activelysupporting R&D activities.I Governments subsidies to education will increase the profitability ofresearch and development activities, and thereby speed uptechnological progress.Théophile T. Azomahou (UNU-MERIT) 03.06.2008 23 / 23

Human capital and growth

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Human capital and growth

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