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2013-027

2013-027

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Research Division
Federal Reserve Bank of St. Louis
Working Paper Series
Talent, Labor Quality, and Economic Development
German CubasB. RavikumarandGustavo Ventura
Working Paper 2013-027Ahttp://research.stlouisfed.org/wp/2013/2013-027.pdf September 2013
 
FEDERAL RESERVE BANK OF ST. LOUISResearch DivisionP.O. Box 442St. Louis, MO 63166
 ______________________________________________________________________________________ The views expressed are those of the individual authors and do not necessarily reflect official positions of the Federal Reserve Bank of St. Louis, the Federal Reserve System, or the Board of Governors.Federal Reserve Bank of St. Louis Working Papers are preliminary materials circulated to stimulatediscussion and critical comment. References in publications to Federal Reserve Bank of St. Louis WorkingPapers (other than an acknowledgment that the writer has had access to unpublished material) should becleared with the author or authors.
 
Talent, Labor Quality, and EconomicDevelopment
German Cubas, B. Ravikumar, and Gustavo Ventura
September 2013
Abstract
We develop a theory of labor quality based on (i) the division of the labor forcebetween unskilled and skilled workers and (ii) investments in skilled workers. In ourtheory, countries differ in two key dimensions: talent and total factor productivity(TFP). We measure talent using the observed achievement levels from the Programmefor International Student Assessment (PISA) scores. Our findings imply that the qual-ity of labor in rich countries is about twice as large as the quality in poor countries.Thus, the implied disparities in TFP levels are smaller relative to the standard growthmodel using a measure of labor quality based on Mincer returns. In our model, theresulting elasticity of output per worker with respect to TFP is about 2.
Keywords:
Economic Development, TFP, PISA, Labor Quality.
JEL Classification:
O11, O40, E10.
University of Houston, Federal Reserve Bank of St. Louis, and Arizona State University, respectively.We thank Hector Chade, Juan Carlos Cordoba, Andr´es Erosa, Oksana Leukhina, Diego Restuccia, Andr´esRodriguez-Clare, and Todd Schoellman for their comments. We also thank the seminar participants at theCentral Bank of Uruguay, Concordia, Di Tella, Econometric Society Meeting (Asia), Economic DevelopmentConference at Toronto, FCS-Uruguay, Human Capital Conference (ASU), ITAM Summer Camp, LACEAMeetings, Macroeconomics Across Time and Space Conference, Research in Economic Dynamics Workshop(Barcelona), SED Meetings, Sabanci, Stony Brook, Texas A&M, UBC, Universidad de Montevideo, USC,and Yale. The usual disclaimer applies. The views expressed in this article are those of the authors and donot necessarily reflect the views of the Federal Reserve Bank of St. Louis or the Federal Reserve System.
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1 Introduction
It is well known by now that the observed cross-country differences in output per workerare large. For example, the richest countries in the world economy are about 30 to 40 timesricher than their poorest counterparts. Klenow and Rodriguez-Clare (1997), Prescott (1998),Hall and Jones (1999), McGrattan and Schmitz (2000), Parente and Prescott (2000), amongothers, have documented that these differences are primarily due to differences in total factorproductivity (TFP).To calculate the relative importance of TFP, researchers measure the cross-country dif-ferences in the quality of workers, or
labor quality 
for short. Traditionally, labor quality hasbeen measured using observations on schooling and Mincerian returns to schooling. Suchmeasurements account for a small fraction of the output per worker differences; see Caselli(2005) for a review. However, what if TFP differences include
unmeasured 
labor qualitydifferences? Recent work follows two approaches to quantify this unmeasured component.One approach uses labor earnings of immigrants from different countries working in the U.S.labor market to quantify cross-country differences in labor quality. Hendricks (2002) andSchoellman (2011) are examples of this approach. The other approach involves developingtheories of labor quality based on unobserved individual heterogeneity and disciplining thekey parameters describing the heterogeneity with observations of U.S. labor earnings. Erosa,Koreshkova, and Restuccia (2010) is an example of this approach.In this paper, we take an alternative approach to the measurement of labor quality and theresulting implications for the importance of TFP. We use direct observations on achievementsof individuals prior to their entry into the labor force as an exogenous input to a theory of labor quality. Concretely, we develop a parsimonious framework in which countries differ intwo key dimensions — talent and TFP. We construct a measure of talent using the
observed 
test score from the Programme for International Student Assessment (PISA) and use ourmeasure of talent and our model to construct a measure of labor quality.
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We then quantifyits role relative to TFP in accounting for cross-country differences in output per worker.Specifically, we ask two questions: How large are the differences in implied labor quality
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Hanushek and Woessmann (2008), using cross-country regressions, argue that skills derived from inter-national assessment tests such as the PISA are more important than schooling in accounting for earningsand growth.
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