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Economic Freedom, Human Rights, and the Returns to Human Capital: An Evaluation of the Schultz Hypothesis

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

T.W. Schultz (1975) proposed that returns to human capital were highest in economic environments where technology, price or production shocks were common and managerial skills to adapt resource allocations to those shocks were most in need. We hypothesize that variation in returns to human capital across developing countries can be explained in part by government institutions that blunt the magnitude of those shocks or that limit individual abilities to respond to those shocks. Using estimated returns to schooling and experience from 122 household surveys from 86 developing countries, we demonstrate a strong positive correlation between economic freedom and returns to human capital. The positive effect is observed at all quantiles of the wage distribution. Economic freedom benefits the most skilled who get higher returns to schooling; but it also benefits the least skilled who get higher returns from experience.

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File URL: http://www2.econ.iastate.edu/papers/p11641-2010-06-22.pdf
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Paper provided by Iowa State University, Department of Economics in its series Staff General Research Papers Archive with number 31641.

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Date of creation: 21 Jun 2010
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Publication status: Published in Economic Development and Cultural Change, October 2012, vol. 61 no. 1, pp. 39-72
Handle: RePEc:isu:genres:31641
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Iowa State University, Dept. of Economics, 260 Heady Hall, Ames, IA 50011-1070

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