The be invested in to increase output.
Theterm human capital was first coined by (Mincer, 1958), where he viewed laborforce as factor which can be invested in to increase output. He defined humancapital as “the stock of knowledge, habits, social and personality attributes,including creativity, embodied in the ability to perform labor so as to produceeconomic value”.
Theeffect of human capital on economic growth is inconsistent throughoutliterature, as some papers show a strong significant impact while other papersreport a negative relation. In this section, a review of previous literaturewill be cited and cause of inconsistency will be addressed.Inthe 1960s, neoclassical model was used for the growth model as developed by(Sollow, 1956).
One feature of this model is the convergence property, whichmeans that lower the real per capita GDP, higher the predicted growth rate. Ifall economies were the same and which is not the case, then convergence wouldapply absolutely, because all economies differ in various ways, thenconvergence would have a conditional effect. Meaning that growth rate tends tobe high if an economy begins below its own target position. Convergenceproperty is conditional because steady state levels and output per workerdepend on population growth, saving rates, government policies, protection ofproperty rights, so on and so forth.
This property is derived from thediminishing returns to capital in the neoclassical model. Low capital perworker would lead to higher rate of returns and thus higher growth rate. Theconcept of capital in the neoclassical model can be broadened to include humancapital, as education, experience and health play a role in it (Lucas, 1988),(Mulligan and Sala-i-Martin, 1993), (Barro and Sala-i-Martin, 1995). A countrythat tends to have a high labor to capital ratio tends to grow more rapidly,because physical capital is much easier to manage and can be allocatedefficiently in a short time. (Ben Habib and Spiegel, 1994) suggest that if theGDP depends more on a countries initial level of per capita output then thestarting amount of human capital is high. Howeverthis rate must diminish as it reaches its steady state. But the long run dataof countries show that a steady positive growth sustains over a century or more.Neo classical theory then fails to predict long run per capita growth.
One exogenousvariable in the model which successfully predicts the long run growth is rateof technological progress. Endogenousgrowth theory thus tries to fill the gap by including technological progress.These models include private incentives to discover new products or productionmethods.
These incentives can be encouraged by patent protection or governmentsubsidies or direct government involvement. This incorporated theory wasinitialized by (Romer, 1990) and includes contributions by (Grossman andHelpman, 1991).(Becker,1962) also popularized investment in human capital. He studied the change inincome due to change in investment cost and rate of returns. He emphasized toinvest in education, healthcare and training. (Schultz, 1971) also worked alongthese lines and found causal relationship in education and healthcare and founda positive effect of these variables on economic growth. Earlycross-country studies find a significant impact of human capital on economicgrowth.
(Rosenzweig, 1990) reported out that major determinant of high growth rateof developed countries and poor growth rate of developing countries isdifference in the human capital growth. (Sachs and Warner, 1997) also reporteda positive relation between healthcare and growth but found that increase inhealth expenditure increases economic growth but a decreasing rate. (Steward etal, 1998) studied cross country data from 1970-1992 between human developmentand economic growth and found a strong two-way causation.
However, strength ofthe relationship from economic growth to human development depends on femaleeducation and social services expenditure whereas income distribution andinvestment rate determine the strength of relationship from human developmentto economic growth. (Lucas, 1993):The main engine of growth is the accumulation of human capital –or knowledge – and the main source of differences in living standards amongnations is a difference in human capital. Physical capital plays an essentialbut decidedly subsidiary role.Arapid decrease in mortality rates lead to the population explosion in the 19thand 20th century.
Increased survival rate and decrease in mortalityled to a population boom, the most significant increase was found in infantmortality rate so there was a large increase in young people. Reductions ininfant mortality lead to a fall in desired fertility, creating a one?time baby?boom. As this large group ages, theresultant changes in population age structure can have significant economic implications.Population growth is defined as the difference between birth and death ratesand improvements in healthcare and decrease in death rates lead to globalpopulation explosion in the 20th century. Health advancement indeveloping countries lead to an initial increase in the number of children.Reduced infant mortality, increased numbers of surviving children, and risingwages for women can lower desired fertility (Schultz, 1997) which leads tosmaller groups of children in future generations.
This process creates a “babyboom” generation that is larger than both preceding and succeeding cohorts.Subsequent health improvements tend primarily to affect the elderly, reducingold?agemortality and lengthening the lifespan. In many theoretical models a populationexplosion reduces income per capita by putting pressure on scarce resources andby diluting the capital–labor ratio. These model predict that populationdecline spur economic growth in per capita terms. For example, the very highdeath rates and decline in population due to the Black Death in fourteenthcentury Europe appear to have caused a shortage of labor, leading to a rise inwages and the breakdown of the feudal labor system (Herlihy, 1997).
However, inmodern population there appears to be little connection between overall populationgrowth and economic growth; indeed the twentieth century saw both a populationexplosion and substantial rises in income levels.