23 June 2015

The Economics of Human Capital

Eric A. Hanushek, Jens Ruhose, Ludger Woessmann, "Human Capital Quality and Aggregate Income Differences: Development Accounting for U.S. States", NBER Working Paper No. 21295 (June 2015).
Although many U.S. state policies presume that human capital is important for state economic development, there is little research linking better education to state incomes. In a complement to international studies of income differences, we investigate the extent to which quality-adjusted measures of human capital can explain within-country income differences. 
We develop detailed measures of state human capital based on school attainment from census micro data and on cognitive skills from state- and country-of-origin achievement tests. Partitioning current state workforces into state locals, interstate migrants, and immigrants, we adjust achievement scores for selective migration. We use the new human capital measures in development accounting analyses calibrated with standard production parameters. 
We find that differences in human capital account for 20-35 percent of the current variation in per-capita GDP among states, with roughly even contributions by school attainment and cognitive skills. Similar results emerge from growth accounting analyses.
I have serious doubts about the narrowness of the definitions of human capital used and the methods used for determining them.  But, I'm not surprised that more educated states whose people come from states with higher test scores outperform those which lack these.

Human capital does not just mean intelligence or education,  Social capital, civil society, attitudes towards authority, self-organization, tolerance, facilitation of networking are at least, and shared values are at least as critical, and unlike IQ and educational achievement which is heavily influenced by IQ and highly correlated with it, social capital is not predominantly genetic in origin and hence more amenable to management with policy solutions.  Lots of human capital resides in cultures and groups, not in individual brain power.

This isn't to say that narrower definitions of human capital don't have a place in economics.  For example, the aggregate number of people with various kinds of health profession degrees and certifications may be a decent way of measuring human capital in the health care industry.  But, in less regulated fields, this approach has declining utility.

Furthermore, achievement scores from places of migration are very poor measures of migrant IQ or education, because migrants are well known to be highly atypical of their places of origin (see, e.g., the "fit immigrant" hypothesis).

This study also does not engage the literature of decreasing economic returns to education.  More education is still almost always better than less education at the individual, and increases in GDP have coincided with increases in average education.  But, returns to a given level of education vary greatly over time and from place to place.

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