Proxying Human Capital

One of the most puzzling results in the literature on economic growth is that it is difficult to show that increases in human capital increase economic growth. In regressions, sometimes human capital shows up positive and significant but sometimes it’s not significant, sometimes it’s null and sometimes it’s negative depending on the precise set of countries and time periods examined. (See Tyler’s earlier post for further skepticism on the link between human capital and growth).

A team of economists at the University of Ottawa, working with Statistics Canada, has concluded that the problem may be one of measurement. They argue that literacy scores (i.e. actual skills) might be a better proxy for human capital than the typical measure, years of schooling, and furthermore, literacy scores are not subject to the usual problems related to the comparability of education systems across countries. Their human capital indicators are based on the results of the 1994 International Adult Literacy Survey, as nicely explained by The Economist:

They use the International Adult Literacy Survey, which tested 16-65-year-olds in [1994], to estimate the skills of people in 14 countries entering the workforce at different times between 1960 and 1995. This is achieved by looking at tests of different age cohorts. For example, the literacy levels of people aged [51-59 when tested in 1994] are used to estimate the competencies of 17-25-year-olds in 1960, and hence the human-capital investment that had just been made in the course of that cohort’s education.

The biggest flaw of that study is that the indicators impute levels of literacy to individuals earlier in their lives, without correcting for the adjustement in the quality of human capital that occurs during an individual’s lifetime through learning and human capital depreciation, however, as The Economist notes, “the fact that it finds such a strong correlation between skills and growth gives a significant boost to human-capital theory”. Click here to read the executive summary or click here to read the entire study.


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