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How Important is Human Capital? A Quantitative Theory Assessment of World Income Inequality

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Author Info
Andres Erosa () (Instituto Madrileño de Estudios Avanzados)
Tatyana Koreshkova () (Concordia University, CIREQ)
Diego Restuccia () (University of Toronto)

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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 R-squared 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.

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Paper provided by Concordia University, Department of Economics in its series Working Papers with number 09007.

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Length: 58 pages
Date of creation: Feb 2009
Date of revision: Mar 2009
Handle: RePEc:crd:wpaper:09007

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Related research
Keywords: output per worker; TFP; human capital; schooling; heterogeneity; inequality;

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Find related papers by JEL classification:
O1 - Economic Development, Technological Change, and Growth - - Economic Development

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Diego Restuccia & Guillaume Vandenbroucke, 2008. "The Evolution of Education: A Macroeconomic Analysis," Working Papers tecipa-339, University of Toronto, Department of Economics. [Downloadable!]
  2. Diego Restuccia, 2008. "The Latin American Development Problem," Working Papers tecipa-318, University of Toronto, Department of Economics. [Downloadable!]
  3. Hashmi, Aamir Rafique, 2007. "Intangible Capital, Barriers to Technology Adoption and Cross-Country Income Differences," MPRA Paper 5729, University Library of Munich, Germany. [Downloadable!]
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