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Lecture 4

ECON 30801 Lecture Notes - Lecture 4: Human Capital

Course Code
ECON 30801

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I. Education and human capital
A. Years of schooling and growth
1. Not a lot of relationship between growth in years of schooling and
economic growth (GDP) in a given country
2. What translates sitting in a classroom into productive capacity to create
B. Human capital
1. What we really care about is human capital: the ability to translate
education into more production of GDP
2. Why might years of education not be the best measure of human capital?
3. We care about education only when/because it leads to people being able
to earn a higher income (human capital)
4. AK (hN)Y= α 1−α
a) Ah )K N(α α 1−α
5. More education → more productive capacity → higher wages
a) More productive capacity is h
b) We have data on education and wages, but hard to get data on
productive capacity, which is what we actually care about so that
we can really transform more education into higher wages
c) The usual assumption: education → capacity relationship
education → wage relationship
d) Imagine you have data on years of school and wage after school
(1) Estimate the wage function w(s) where s is years of school
(2) Usual assumption: h(s)
1 =w(s)
(3) Example: and12 (high school grad)s2=
| and 6 (college grad)s1= 1 0000 w1= 5 0000w2= 3
(4) → college graduate earns 67% more than a
w(s1) =30,000
50,000 =3
HS graduate → college grad has 67% higher human
capital than HS grad, but is this really the case?
6. Earliest Attempts
a) In the 1990s and early 2000s, we did not have very good
individual-level data
b) Estimates were based on aggregate, country level data
c) Problem: miss some overlap in educational attainment
(1) Average in poor countries = 5 years, rich countries = 10
(2) Don’t see high school grad in both rich and poor country to
(3) This led to incorrect data saying that if a poor person goes
to college in a poor country, it will have the same returns of
a rich person going to college in a rich country
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