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Economic freedom, human rights, and the returns to human capital : an evaluation of the Schultz hypothesis

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  • King, Elizabeth M.
  • Montenegro, Claudio E.
  • Orazem, Peter F.

Abstract

According to T.W. Schultz, the returns to human capital are highest in economic environments experiencing unexpected price, productivity, and technology shocks that create"disequilibria."In such environments, the ability of firms and individuals to adapt their resource allocations to shocksbecomes most valuable. In the case of negative shocks, government policies that mitigate the impact of the shock will also limit the returns to the skills of managing risk or adapting resources to changing market forces. In the case of positive shocks, government policies may restrict access to credit, labor, or financial markets in ways that limit reallocation of resources toward newly emerging profitable sectors. This paper tests the hypothesis that the returns to skills are highest in countries that allow individuals to respond to shocks. Using estimated returns to schooling and work experience from 122 household surveys in 86 developing countries, this paper demonstrates a strong positive correlation between the returns to human capital and economic freedom, an effect that is observed throughout the wage distribution. Economic freedom benefits those workers who have attained the most schooling as well as those who have accumulated the most work experience.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 5405.

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Date of creation: 01 Aug 2010
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Handle: RePEc:wbk:wbrwps:5405

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Keywords: Debt Markets; Political Economy; Economic Theory&Research; Labor Policies; Population Policies;

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  1. Belton M. Fleisher & Klara Sabirianova Peter & Xiaojun Wang, 2004. "Returns to Skills and the Speed of Reforms: Evidence from Central and Eastern Europe, China, and Russia," William Davidson Institute Working Papers Series 2004-703, William Davidson Institute at the University of Michigan.
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  1. Economic Freedom and Returns to Human Capital
    by UDADISI in UDADISI on 2012-09-11 12:52:00
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Cited by:
  1. King, Elizabeth M. & Montenegro, Claudio E. & Orazem, Peter F., 2010. "Economic freedom, human rights, and the returns to human capital : an evaluation of the Schultz hypothesis," Policy Research Working Paper Series 5405, The World Bank.

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