Technological Change in the Production of Human Capital: Implications for Human Capital Stocks, Wages and Skill Differentials

In this paper we explicitly model and estimate an education system that produces human capital. An important innovation is that technological change in the production functions associated with any level of education is permitted and the rate of change may be different at different levels and for different countries. Technological change is taken for granted for almost all other production functions, yet in most discussions of human capital including the current debate over widening skill differentials, it plays no role. It is rarely even discussed. The approach taken here is in the same spirit as recent work on estimating a true price series for computers based on an underlying constant standard of computations per second. An important part of the work is the choice of this standard for human capital. Individuals take the education system as given and choose paths of human capital investment to maximize lifetime wealth. The endogenous nature of human capital investment makes the human capital associated with any observed characteristic, such as years of schooling, reflective of selection effects as well as technological change effects. In this framework, an efficiency units model of human capital, amended to include technical change as well as selection, is consistent with the basic pattern of wages in the United States in the last three decades. New series on the human capital input (efficiency units) and the price of this input for 1976-2001 are computed, based on a cohort analysis that incorporates technical change and selection. The price series show s a substantial secular decline to the early 1990's followed by an increase to 2001. The efficiency units series include a breakdown by a variety of characteristics, including observed years of schooling. Together with the price series this determines a time path for any wage differential by any observed measures such as college attendance. A natural consequence of this framework is that changes in differentials such as that between college and high school will be cohort determined without reference to relative supplies. This is consistent with the recent evidence on this widening differential - that it is largely confined to recent cohorts.