The term human capital was first coined by (Mincer,
1958), where he viewed labor force as factor which can be invested in to
increase output. He defined human capital as “the stock of knowledge, habits,
social and personality attributes, including creativity, embodied in the
ability to perform labor so as to produce economic value”.
effect of human capital on economic growth is inconsistent throughout
literature, as some papers show a strong significant impact while other papers
report a negative relation. In this section, a review of previous literature
will be cited and cause of inconsistency will be addressed.
the 1960s, neoclassical model was used for the growth model as developed by
(Sollow, 1956). One feature of this model is the convergence property, which
means that lower the real per capita GDP, higher the predicted growth rate. If
all economies were the same and which is not the case, then convergence would
apply absolutely, because all economies differ in various ways, then
convergence would have a conditional effect. Meaning that growth rate tends to
be high if an economy begins below its own target position. Convergence
property is conditional because steady state levels and output per worker
depend on population growth, saving rates, government policies, protection of
property rights, so on and so forth. This property is derived from the
diminishing returns to capital in the neoclassical model. Low capital per
worker would lead to higher rate of returns and thus higher growth rate.
concept of capital in the neoclassical model can be broadened to include human
capital, as education, experience and health play a role in it (Lucas, 1988),
(Mulligan and Sala-i-Martin, 1993), (Barro and Sala-i-Martin, 1995). A country
that tends to have a high labor to capital ratio tends to grow more rapidly,
because physical capital is much easier to manage and can be allocated
efficiently in a short time. (Ben Habib and Spiegel, 1994) suggest that if the
GDP depends more on a countries initial level of per capita output then the
starting amount of human capital is high.
this rate must diminish as it reaches its steady state. But the long run data
of countries show that a steady positive growth sustains over a century or more.
Neo classical theory then fails to predict long run per capita growth. One exogenous
variable in the model which successfully predicts the long run growth is rate
of technological progress.
growth theory thus tries to fill the gap by including technological progress.
These models include private incentives to discover new products or production
methods. These incentives can be encouraged by patent protection or government
subsidies or direct government involvement. This incorporated theory was
initialized by (Romer, 1990) and includes contributions by (Grossman and
1962) also popularized investment in human capital. He studied the change in
income due to change in investment cost and rate of returns. He emphasized to
invest in education, healthcare and training. (Schultz, 1971) also worked along
these lines and found causal relationship in education and healthcare and found
a positive effect of these variables on economic growth.
cross-country studies find a significant impact of human capital on economic
growth. (Rosenzweig, 1990) reported out that major determinant of high growth rate
of developed countries and poor growth rate of developing countries is
difference in the human capital growth. (Sachs and Warner, 1997) also reported
a positive relation between healthcare and growth but found that increase in
health expenditure increases economic growth but a decreasing rate. (Steward et
al, 1998) studied cross country data from 1970-1992 between human development
and economic growth and found a strong two-way causation. However, strength of
the relationship from economic growth to human development depends on female
education and social services expenditure whereas income distribution and
investment rate determine the strength of relationship from human development
to economic growth. (Lucas, 1993):
The main engine of growth is the accumulation of human capital –
or knowledge – and the main source of differences in living standards among
nations is a difference in human capital. Physical capital plays an essential
but decidedly subsidiary role.
rapid decrease in mortality rates lead to the population explosion in the 19th
and 20th century. Increased survival rate and decrease in mortality
led to a population boom, the most significant increase was found in infant
mortality rate so there was a large increase in young people. Reductions in
infant mortality lead to a fall in desired fertility, creating a one?time baby?boom. As this large group ages, the
resultant changes in population age structure can have significant economic implications.
Population growth is defined as the difference between birth and death rates
and improvements in healthcare and decrease in death rates lead to global
population explosion in the 20th century. Health advancement in
developing countries lead to an initial increase in the number of children.
Reduced infant mortality, increased numbers of surviving children, and rising
wages for women can lower desired fertility (Schultz, 1997) which leads to
smaller groups of children in future generations. This process creates a “baby
boom” generation that is larger than both preceding and succeeding cohorts.
Subsequent health improvements tend primarily to affect the elderly, reducing
mortality and lengthening the lifespan. In many theoretical models a population
explosion reduces income per capita by putting pressure on scarce resources and
by diluting the capital–labor ratio. In these models population declines spur
economic growth in per capita terms. For example, the very high death rates and
decline in population due to the Black Death in fourteenth century Europe
appear to have caused a shortage of labor, leading to a rise in wages and the
breakdown of the feudal labor system (Herlihy, 1997). However, in modern
population there appears to be little connection between overall population
growth and economic growth; indeed the twentieth century saw both a population
explosion and substantial rises in income levels.