Human capital and growth: Theory and evidence

Abstract

As suggested by its title, this paper offers both theory and evidence on the connection between human capital and growth, but only if both "theory" and "evidence" are interpreted broadly.The theory is really no more than a conceptual framework for thinking about growth, one that is intended to be useful in the analysis of data.It generates neither a set of equations to be solved for an equilibrium nor sharp quantitative predictions.Correspondingly, the empirical analysis presented here is no more than a preliminary attempt at exploratory data analysis guided by the framework.Section II below presents the outline of the theoretical framework.Its conclusions for data analysis can be simply stated.If one allows for an explicit research and development activity designed to foster the creation of new goods, simple growth accounting relationships do not hold.In addition to the usual relationships between the rate of growth of inputs and the rate of growth of outputs suggested by growth accounting, there may be a role for the level of human capital variables to explain the rate of growth of output.In a regression equation that tries to estimate separate roles for both physical investment and human capital variables in explaining the rate of output growth, collinearity may cause the human capital variables to enter insignificantly.They should still have explanatory power for investment.The empirical part of the paper illustrates how this observation can