Abstract
This paper investigates the effect of human capital on economic growth in OECD countries by focusing on two different channels: (1) absorption of superior technologies, and (2) augmentation of factors of production. One recent empirical study found that in isolation each channel appears insignificant, which implies that estimates that emanate by restrictive specifications that account for only a subset of these channels are likely to suffer from an omitted variable bias. Using an augmented specification (with interaction terms between the initial level of real GDP per capita and the average years of schooling), we find that OECD countries that start with a higher stock of human capital grow faster, which implies that human capital influences economic growth through the first channel only. Our results differ from previous studies (that investigated both channels), which either confirmed the simultaneous (positive or neutral) effect from both channels, or found that only the second channel had an isolated positive effect. We use a broad array of measures as proxies for human capital (six measures for educational attainment, and two measures for health status). We also account for the quality of human capital.
Definition and source of the variables.
| Variables | Definition | Source |
|---|---|---|
| Real GDP per capita | Logarithm of real GDP per capita (constant 2010 US$) | World Development Indicators |
| Growth rate of real GDP per capita | First difference of the logarithm of real GDP per capita (constant 2010 US$) | |
| Investment | Gross capital formation as % of GDP. It consists of outlays on additions to the fixed assets of the economy plus net changes in the level of inventories. | |
| Life expectancy | Logarithm of life expectancy at birth, total (years). It indicates the number of years a newborn infant would live if prevailing patterns of mortality at the time of its birth were to stay the same throughout its life. | |
| Infant mortality rate | Infant mortality rate (per 1000 live births). It is the number of infants dying before reaching one year of age, in a given year. | |
| Fertility rate | Logarithm of total fertility rate. It represents the number of children that would be born to a woman if she were to live to the end of her childbearing years and bear children in accordance with age-specific fertility rates of the specified year. | |
| Inflation | Inflation, GDP deflator (annual %) | |
| Terms-of-trade change | The growth rate of the ratio of export to import prices. | |
| Trade | The sum of exports and imports of goods and services, as % of GDP. | |
| Government consumption | General government final consumption expenditure, as % of GDP. It includes all government current expenditures for purchases of goods and services (including compensation of employees). It also includes most expenditures on national defense and security, but excludes government military expenditures that are part of government capital formation. | |
| Average years of schooling at various levels | Average years of schooling at various levels (age 25 and over). | Barro and Lee (2013) dataset (v. 2.2, 2018) |
| Human capital index | It is based on the average years of schooling and an assumed rate of return to education, based on Mincer equation estimates around the world | PWT (v. 9.1) |
| Democracy | Freedom house political rights index. Measure of the level of democracy. Ranging from 1 to 7, where 1 is most free and 7 least free. The index measures the degree of freedom in the electoral process, political pluralism and participation, and functioning of government | Freedom House |
| Harmonized learning outcome (HLO) score | HLO scores are produced using a conversion factor to compare international standardized achievement tests. All mean scores are calculated on a scale with a center point of 500, and a standard deviation across students of 30 points | Altinok et al. (2018) |
Descriptive statistics (1995–2014).
| Variables | Obs. | Mean | Std. Dev. | Min. | Max. |
|---|---|---|---|---|---|
| Growth rate of real GDP per capitab | 139 | 2.186 | 1.984 | −1.369 | 8.994 |
| Lagged real GDP per capitaa | 139 | 10.136 | 0.716 | 8.544 | 11.526 |
| Investment | 144 | 23.664 | 3.822 | 13.693 | 34.957 |
| Life expectancya | 144 | 4.346 | 0.045 | 4.195 | 4.416 |
| Infant mortality rate | 144 | 6.418 | 5.413 | 2 | 42.8 |
| Fertility ratea | 144 | 0.498 | 0.222 | 0.073 | 1.108 |
| Terms-of-trade change | 144 | −0.759 | 3.921 | −30.226 | 4.850 |
| Trade | 144 | 87.814 | 50.219 | 18.565 | 3447.038 |
| Government consumption | 144 | 18.774 | 4.151 | −0.390 | 26.439 |
| Democracy | 144 | 1.159 | 0.512 | 1 | 4.2 |
| Inflation | 144 | 4.312 | 8.482 | −1.332 | 88.533 |
| Secondary schooling (male and female 25+) | 144 | 3.930 | 0.994 | 1.17 | 6.90 |
| Total schooling (male and female 25+) | 144 | 10.437 | 1.707 | 4.81 | 13.42 |
| Secondary and tertiary schooling (male and female 25+) | 144 | 4.667 | 1.224 | 1.50 | 7.71 |
| Primary schooling (male and female 25+) | 144 | 5.769 | 1.151 | 3.30 | 8.99 |
| Tertiary schooling (male and female 25+) | 144 | 0.736 | 0.321 | 0.25 | 1.76 |
| Human capital index (male and female) | 144 | 3.114 | 0.385 | 1.854 | 3.703 |
| Harmonized learning outcome (HLO) score | 122 | 504.52 | 40.65 | 351.9 | 605.92 |
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Source: Author’s calculations. aVariables are in logarithm form. bVariables are in first difference of the logarithm.
Average annualized growth rates and average initial stocks of human capital (1995–2014).
| Country | Average annualized growth rates of real GDP per capita (%) | Average initial stocks of human capital (different measures in terms of educational attainment) | ||||
|---|---|---|---|---|---|---|
| Primary schooling | Secondary schooling | Tertiary schooling | Secondary and tertiary schooling | Total schooling | ||
| Australia | 1.85 | 5.82 | 4.67 | 0.98 | 5.65 | 11.47 |
| Austria | 1.62 | 3.90 | 4.98 | 0.44 | 5.42 | 9.32 |
| Belgium | 1.47 | 5.53 | 3.97 | 0.86 | 4.83 | 10.36 |
| Canada | 1.30 | 5.79 | 4.69 | 1.12 | 5.81 | 11.60 |
| Chile | 3.85 | 5.21 | 3.31 | 0.55 | 3.86 | 9.07 |
| Czech Republic | 1.74 | 8.89 | 3.50 | 0.41 | 3.91 | 12.80 |
| Denmark | 1.32 | 5.35 | 4.71 | 0.78 | 5.49 | 10.84 |
| Estonia | 4.63 | 5.96 | 4.80 | 0.94 | 5.74 | 11.70 |
| Finland | 1.61 | 4.85 | 3.82 | 0.82 | 4.63 | 9.49 |
| France | 1.11 | 4.72 | 4.41 | 0.57 | 4.98 | 9.70 |
| Germany | 1.28 | 5.16 | 5.38 | 0.67 | 6.05 | 11.21 |
| Greece | 1.64 | 5.41 | 3.03 | 0.76 | 3.79 | 9.20 |
| Hungary | 2.53 | 7.87 | 2.93 | 0.56 | 3.49 | 11.36 |
| Iceland | 1.44 | 5.62 | 3.46 | 0.67 | 4.13 | 9.75 |
| Ireland | 3.49 | 6.50 | 3.78 | 1.01 | 4.79 | 11.29 |
| Israel | 1.79 | 5.88 | 4.86 | 1.27 | 6.13 | 12.01 |
| Italy | 0.75 | 4.56 | 3.87 | 0.33 | 4.20 | 8.76 |
| Japan | 0.78 | 5.85 | 4.15 | 0.90 | 5.05 | 10.90 |
| Republic of Korea | 4.80 | 5.58 | 4.26 | 1.08 | 5.34 | 10.92 |
| Latvia | 5.27 | 5.06 | 4.17 | 0.53 | 4.70 | 9.76 |
| Lithuania | 5.41 | 5.08 | 4.36 | 0.71 | 5.07 | 10.15 |
| Luxembourg | 2.33 | 5.50 | 3.94 | 0.70 | 4.64 | 10.14 |
| Mexico | 0.87 | 4.43 | 2.54 | 0.48 | 3.02 | 7.45 |
| Netherlands | 1.78 | 5.84 | 4.41 | 0.80 | 5.21 | 11.05 |
| New Zealand | 1.47 | 6.73 | 3.66 | 1.15 | 4.81 | 11.54 |
| Norway | 1.88 | 6.58 | 4.12 | 0.77 | 4.89 | 11.47 |
| Poland | 3.75 | 7.19 | 2.96 | 0.48 | 3.44 | 10.63 |
| Portugal | 1.50 | 4.34 | 1.98 | 0.30 | 2.28 | 6.62 |
| Slovak Republic | 4.31 | 8.69 | 3.03 | 0.41 | 3.44 | 12.13 |
| Slovenia | 2.09 | 7.31 | 3.80 | 0.56 | 4.36 | 11.67 |
| Spain | 1.57 | 5.28 | 3.31 | 0.67 | 3.98 | 9.26 |
| Sweden | 1.64 | 5.78 | 4.98 | 0.83 | 5.81 | 11.59 |
| Switzerland | 0.74 | 5.94 | 4.47 | 0.76 | 5.23 | 11.17 |
| Turkey | 2.27 | 3.88 | 1.54 | 0.32 | 1.86 | 5.74 |
| United Kingdom | 1.57 | 5.68 | 4.16 | 0.78 | 4.94 | 10.62 |
| United States of America | 1.48 | 5.94 | 5.51 | 1.59 | 7.10 | 13.04 |
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Source: Author’s calculations. Human capital measures are given in terms of average years of schooling for males and females aged 25 and over (source: Barro and Lee 2013, v. 2.2, 2018 dataset).
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