Juniebe L.

Manganohoy, RPm, LPT, MPA

Student of Doctor in Public Administration
PA 331: Seminar on the Administration of
Economic Development
• During the last decade of the twentieth century, economics witnessed
a revival of interest in the determinants of the rate of long-run growth,
a revival that seemed to many economists long overdue after the
emphasis on short-term aggregate fluctuations during the previous
two decades.

• First, there is a long history of interest in human capital and growth

by social scientists.

• Second, human capital is a complex term that eschews a simple

definition and measurement and is a concept that has been
investigated from a variety of perspectives by social scientists.

Introduction to Human Capital

and Economic Growth
• Smith considered that in addition to buildings,
machines, and land improvements the concept of “fixed
capital” should also include “the acquired and useful
abilities of all the inhabitants or members of the society.
The acquisition of such talents, by the maintenance of
the acquirer during his education, study, or
apprenticeship, always costs a real expense, which is a
capital fixed and realized, as it were, in his person”
- Adam Smith, Wealth of Nations

The Concept of Human Capital:

A Brief Historical Review
• According to Smith, one source of human capital was
experience gained as labor became more specialized
according to the principle of the division of labor.
employment opportunities, especially for young
children, increased the opportunity cost of education
thereby leading to widespread ignorance:
• A second source of human capital was education, either
formal in schools and universities or through
apprenticeships.

The Concept of Human Capital:

A Brief Historical Review
• Smith argued that the cost of human capital was
‘excessive’ because
• (1) apprenticeships were too long and could be
completed in a much shorter period;
• (2) were a disincentive to work because apprentices had
to wait for a long time to benefit from it; and
• (3) “robbed a man of the property he had in his own
labor and bodily skills”

The Concept of Human Capital:

A Brief Historical Review
• The inclusion of human beings in the concept of capital
was not universally accepted. Alfred Marshall in his
Principles of Economics considered the notion that
human beings are part of capital as “unrealistic”
because human beings are not marketable.

The Concept of Human Capital:

A Brief Historical Review
• On the other hand, in the Nature of Capital and Income,
Irving Fisher includes human beings as capital
because they satisfy the definition of capital, that is,
“useful appropriated material object”

The Concept of Human Capital:

A Brief Historical Review
• The most comprehensive application of the human
capital concept during the pre-World War II period was
Walsh (1935). His focus was on one aspect of human
behavior as capital formation: expenditures to acquire
education, where such expenditures are made for
purposes of profit maximization and these
expenditures respond to much the same economic
motives that lead to investment in physical capital.

The Concept of Human Capital:

A Brief Historical Review
• Modeling the role of human capital in the economic
growth process has presented several challenges. The
Solow–Swan model of neoclassical growth has
afforded a convenient point of departure from which to
analyze the contribution of human capital.

Theoretical Models of Human

Capital and Economic Growth
• In the framework of the Solow–Swan model,
countries with higher savings rates will have a higher
per capita income in equilibrium than poorer countries,
but will have zero economic growth.

• The model concludes that there can be no long-run

economic growth, even though different economies may
differ in terms of their equilibrium per capita income.

Theoretical Models of Human

Capital and Economic Growth
• In our general overview so far, the only form
of capital considered is physical capital that
is accumulated through investment in
machinery and equipment. In the human
capital-extended Solow–Swan model of
Mankiw, Romer, and Weil (1992), in
addition to physical capital, human capital
also enters the production function.

Theoretical Models of Human

Capital and Economic Growth
• The main message of the AK approach
discussed in Chapter 3 is that, by contrast to
the neoclassical model, a sustained rate of
growth is possible in the absence of
technological progress.
• One undesirable feature of the AK model,
however, is the fixed-coefficient production
function implicit in 3.37.

Theoretical Models of Human

Capital and Economic Growth
Theoretical Models of Human
Capital and Economic Growth
• Labor-augmenting technical change
introduces the notion of effective labor units
and allows per capita income and the
capital–labor ratio to grow at the same rate
as the exogenous rate of technical change (at
a nonzero constant rate).

Theoretical Models of Human

Capital and Economic Growth
• The learning-by-doing models arrive at a constant nonzero growth rate
because the positive human capital externality overcomes diminishing returns.
An individual’s higher level of capital contributes to an increase in labor
productivity for all workers in the economy, and the more workers (the greater
the population) in the country, the higher the positive externality effect.

Theoretical Models of Human

Capital and Economic Growth
• The nonlinear impact of human capital on economic
growth typically stems from the presence of thresholds
in the levels of human and physical capital. These
thresholds arise as a result of physical or human capital
accumulation that produces shifts in aggregate
productivity.
• The possibility of low-growth equilibria suggests a role
for government policy in the educational sector to
promote sustained high growth through policies (such
as educational subsidies) that support skill acquisition
and higher educational attainments.
Threshold Effects, Multiple Equilibria,
and Nonlinearities in Human Capital
and Economic Growth
• A different interpretation to that of threshold-
induced nonlinearities that classify countries into
clubs holds that nonlinearities may not reflect
different steady states but are simply differences
in the timing as countries approach the steady
state. According to this interpretation, all
countries eventually move from stagnation to
growth but this process will differ from country to
country.

Threshold Effects, Multiple Equilibria,

and Nonlinearities in Human Capital
and Economic Growth
• It will concentrate mainly on studies that use
statistical data from a cross section of countries
and employ econometric estimation techniques.
Thus, it will not consider the many studies that
focus solely on one or a handful of countries
and/or studies that use calibration or simulation
methods.

Empirical Studies on Human Capital

and Economic Growth
• Subsequent studies have questioned this result by
broadening the definition of human capital (to
include education at different levels) as well as
alternative measures of human capital. The early
studies tended to emphasize the use of enrollment
rates (flows) for primary or secondary education.

• More recent studies have used stock measures,

that is, mean years of schooling of a country’s
adult population.

Empirical Studies on Human Capital

and Economic Growth
• Most of the empirical literature on growth and
human capital takes as a starting point the dual
question of, first, whether the quantity of education
(the empirical measure most closely associated
with the concept of human capital) has a positive
impact on the rate of economic growth

and, second, the magnitude of any such effect. One

of the most popular ways of modeling empirically
the macroeconomic contribution of human capital
emphasizes the process of convergence to the steady
state.
A General Empirical Framework for Estimating the
Contribution of Human Capital to Economic Growth
• An alternative way of assessing empirically the
role of human capital, also within the general
confines of the growth accounting methodology, is
as an input to technological progress rather than as
a direct input into aggregate production. According
to this approach, aggregate production depends on
inputs of labor (number of workers) and physical
capital described by the production function Y(t) =
A(t)K(t)αL(t)β.

A General Empirical Framework for Estimating the

Contribution of Human Capital to Economic Growth
• The impact of human capital on growth depends on
the measure of human capital. Regression
specification (1) confirms that an increase in
total mean years of schooling will have a
positive effect on growth, although the effect is
not statistically significant. In specification (2)
we differentiate between total years of
education by sex and find that formal education
for males has a positive effect on growth, but
female education has the opposite effect; both
estimates are statistically significant.
Human Capital and Economic Growth:
Linear Specifications
• In this chapter we present an introduction to
nonparametric methods with a view to their
specific application in testing the human capital-
growth relationship. A more complete and detailed
exposition of these methods is provided in Härdle
(1990), Härdle and Linton (1994), Li and Racine
• (2006), Pagan and Ullah (1999), Silverman
(1986), and Stock (1989).

A Primer on Nonparametric Methods

and Their Application to Research in
Human Capital and Economic Growth
• Before we embark on the
discussion of the main tools
of nonparametric
methodology, it is instructive
to present the basic idea
behind them by means of a
graph. Figure 8.1 presents the
scatter plot of some unknown
relationship that may, for
example, represent the
relationship between growth
of income per capita (Y ) and
the stock of human capital
(X).
A General Overview of Nonparametric Econometric
Methods
• Each circle defines a
neighborhood of points that are
centered at a given point.
Suppose that we are looking at
the circle centered at point A
with coordinates (yA, xA). Then
the nonparametric method
averages all the y-values that
correspond to the data points in
the circle to obtain the estimate
of the regression function at the
x-coordinate of A, xA.

A General Overview of Nonparametric Econometric

Methods
• The simplest nonparametric
estimator, the histogram, divides
the range of data (growth rates)
into distinct nonoverlapping
intervals known as bins. These
bins form the bases of
rectangles (bars) whose heights
denote the proportion of data
that fall in that bin. For example
the height of the bar that
includes all the observations of
countries with growth rates
between 1.5 and 2.5 percentage
points is the proportion of
growth rates xi such that (2− 12
< xi ≤ 2+ 12 ).
A General Overview of Nonparametric Econometric
Methods
• Durlauf and Johnson (1995)
assume that countries
follow different laws of
motion to the steady state.
They used regression-tree
methodology that divided
countries into four
subgroups according to
their initial level of per
capita income and literacy
rate.

Human Capital and Economic Growth:

Nonlinear Specifications
END….