Chapter 6
HUMAN CAPITAL
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Give a man a fish and you feed him for a day
Teach a man to fish and you feed him
for a lifetime.
__Chinese proverb
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Human Capital (HC)
• A worker can be weak or strong, ill or healthy,
ignorant or educated.
• Smart or tireless workers are able to earn higher
wages.
• Differences in the quality of workers are one
explanation for differences in income among
countries.
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Properties of HC
Human capital shares several important properties
with physical capital:
• Focus on the qualities that are produced.
• Focus on qualities of people that are productive.
• Human capital earns a return as well.
• Human capital depreciates.
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HC in the form of Health
Health is something that people value for itself.
But health also has a productive side:
Healthier people can work harder and longer, they
can also think more clearly. Healthier students can
learn better.
Hence, better health in a country will raise its level
of income
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Figure 6.1 Nutrition versus GDP per Capita
Sources: FAOSTAT database, Heston, Summers, and Aten (2011).
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Figure 6.2 Life Expectancy versus GDP per
Capita
Sources: Heston, Summers, and Aten (2011), World Development Indicators database.
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Some data
Average doctors per thousand people:
• 2.2 in OECD
• 0.8 in developing countries
• 0.3 in sub-Saharan Africa
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Figure 6.3 How Health Interacts with Income
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Health and Income
Raising income in a given country will improve its
level of health.
Improving health in a country will raise its level of
income.
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Figure 6.4 Health and Income per Capita:
Two Views
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Figure 6.5 Effect of an Exogenous Shift in
Income
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HC in the form of Education
People work with their minds as well as their bodies.
In developed economies, intellectual ability is far
more important than physical ability in determining
a person’s wage.
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Table 6.1 Changes in the Level of
Education, 1975-2010
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Value of Education
• Return to education: Increase in wage that a
worker would receive if he or she had one more
year of schooling
• College premium: the ratio of the wages of
workers with college education to those with a
high-school degree
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Figure 6.6 Effect of Education on Wages
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Figure 6.7 Share of Hours Worked by
Education Level, 1940–2008
Sources: Autor, Katz, and Krueger (1998), Autor, Katz, and Kearney (2008), Acemoglu and Autor (forthcoming).
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Figure 6.8 Ratio of College Wages to
High-School Wages
Sources: Autor, Katz, and Krueger (1998), Autor, Katz, and Kearney (2008), Acemoglu and Autor (2010).
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Table 6.2 Breakdown of the Population by
Schooling and Wages
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Figure 6.9 Share of Human Capital in Wages
in Developing Countries
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Figure 6.10 Share of Human Capital in Wages
in Advanced Countries
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Some calculation…
Wages are 2/3 of national income
Share of wages paid to human capital
• 59% in developing countries
• 68% in advanced countries
Human capital’s share of national income
• 40% in developing countries
• 45% in advanced countries
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Figure 6.11 Average Years of Schooling
versus GDP per Capita
Sources: Barro and Lee (2010), Heston, Summers, and Aten (2011).
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Figure 6.12 Predicted versus Actual GDP per
Worker
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Figure 6.13 Student Test Scores versus GDP
per Capita
Source: PISA (2009).
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Labor Augmenting Production
Y = AKα(hL)1-α
• A: measure of productivity
• K: capital
• L: number of workers
• h: the amount of labor input per worker
• hL: total labor input
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Steady State
The production function:
In per capita terms:
Y = h1-αAKαL1-α
y = h1-αAkα
Therefore, steady states are:
kss = (σh1-αA/(δ+n))1/(1-α) = h(σA/(δ+n))1/(1-α)
yss = hA1/(1-α) (σ/(δ+n)) α/(1-α)
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