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How important is human capital? A quantitative theory assessment of world income inequality

Andres Erosa (), Tatyana Koreshkova () and Diego Restuccia ()

No 2009-11, Working Papers from Instituto Madrileño de Estudios Avanzados (IMDEA) Ciencias Sociales

Abstract: We develop a quantitative theory of human capital investments in order to evaluate the magnitude of cross-country differences in total factor productivity (TFP) that explains the variation in per-capita incomes across countries. We build a heterogeneous-agent economy with cross-sectional variation in ability, schooling, and expenditures on schooling quality. By embedding our analysis in a growth model with tradable and non-tradable sectors, we model sectorial productivity differences across countries, as documented in Hsieh and Klenow (2007). The parameters governing human capital production and random ability and taste processes are restricted by a set of cross-sectional data moments such as variances and intergenerational correlations of earnings and schooling, as well as slope coefficient and R2 in a Mincer regression. Our main finding is that human capital accumulation strongly amplifies TFP differences across countries: To explain a 20-fold difference in the output per worker the model requires a 5-fold difference in the TFP of the tradable sector, versus an 18-fold difference if human capital is fixed across countries. Moreover, we find that sectorial productivity differences play a prominent role in quantitative implications of the theory.

Date: 2009-09-30
New Economics Papers: this item is included in nep-dge, nep-eff, nep-hap, nep-hrm, nep-lab and nep-ltv
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Published in Review of Economic Studies 77(4), October 2010: 1421-1449

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Related works:
Journal Article: How Important Is Human Capital? A Quantitative Theory Assessment of World Income Inequality (2010) Downloads
Working Paper: How Important is Human Capital? A Quantitative Theory Assessment of World Income Inequality (2009)
Working Paper: How Important is Human Capital? A Quantitative Theory Assessment of World Income Inequality (2007)
Working Paper: How Important is Human Capital? A Quantitative Theory Assessment of World Income Inequality (2007) Downloads
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