Skills for growth: human capital composition and economic performance

By Fabio Manca.

The role played by human capital and skills in fostering economic growth and technological progress has been the focus of a large strand of economic literature for decades. That said, at the beginning of the century, economists were still struggling to clearly pin down the contribution of human capital on the economic growth of a large sample of countries.

In 2001, for instance, Lant Pritchett was still wondering: “Where has all the education gone?” when referring to the weak and sometimes contradictory macroeconomic empirical evidence of a large collection of panel studies on education and growth.

Partly as a reaction to such puzzling ‘absence-of-results’, more recent empirical literature (Acemoglu et al. (2006), Vandenbussche et al. (2006), Aghion et al. (2009) or Papakostantinou (2014)) argued that the composition of a country’s human capital (e.g. the share of skilled over unskilled workers) rather than average measures of education (e.g. years of schooling) should be used to explain the heterogeneous growth patterns across countries.

More specifically, this strand of literature stressed that the specific effect of different levels of skills (e.g. high or low skills) on growth would depend on the type of technological activities carried out by each economy (namely whether a country performs technology innovation or technology adoption). Innovation rather than adoption would depend, ultimately, on a country’s stage of development.

But, let us take a step back.

On average, less developed countries (LDCs) are found farther away from the technology frontier. By that, it is usually meant that their innovation systems and R&D infrastructures (e.g. labs, research centres, etc.) are weak and their scientific and innovative contributions poor. Not being innovators, these countries are, instead, technology adopters that absorb, and in certain cases imitate, foreign technologies (Benhabib and Spiegel, 2005).

More developed economies, instead, are usually closer to the technology frontier and, as such, they are technology innovators (see Figure 1).

Now, the above-mentioned economic literature argued that being close or far away from the technology frontier (e.g. being a rich or poor country, performing innovation or adoption respectively) determines whether unskilled or skilled human capital should be preferred as a driver to spur economic growth.

More specifically, it has been assumed that skilled workers would be well suited to perform technology innovation but, at the same time, that technology adoption would be better performed by unskilled human capital, being that technology adoption is a relatively ‘easier’ activity than innovation.

Vandenbussche, Aghion and Meghir (2006) argue, for instance, that “tasks of imitation and innovation require different types of human capital; in particular, it is reasonable to assume that unskilled human capital is better suited to imitation than to innovation”. Also, it is assumed that “a marginal increase in the stock of unskilled human capital enhances productivity growth all the more the economy is further away from the technological frontier” (e.g. all the more a country under-developed).

This latter piece of the assumption has potentially important implications for the growth strategies of developing countries whose focus has been heavily put on the development of primary education (e.g. low skills) rather than of higher levels of education (e.g. high skills).

In a recent research with Fabio Cerina we argue that much more emphasis should be put on developing high skills in LDCs countries as a tool to boost their economic growth. In fact, our theoretical and empirical results (run on a sample of 85 developing and developed countries for the period in between 1960 and 2000) show that increasing the share of high skilled workers has a relatively larger growth effect in developing rather than developed countries even after accounting for differences in institutional quality across countries.

There are different reasons to believe that skilled workers (rather than unskilled ones) may be fundamental for the growth of developing countries, and this, regardless of the fact that these countries may be growing out of technology adoption rather than innovation.

First, technology adoption is not a free lunch that whoever can benefit from. On the contrary, technology adoption, as well as technology imitation, are skill demanding activities which are better performed by educated workers than uneducated ones. Previous empirical literature has stressed a similar point. Mansfield, Schwartz and Wagner (1981), Coe and Helpman (1995) or Behnabib and Spiegel (2005) argue, directly or indirectly, that the cost of the adaptation and imitation of technologies discovered at the frontier (or in other technological sectors) is positive and that investments in human capital are hence needed in order to absorb and adopt foreign technologies.

 This has several implications. The most important one is that the growth challenge facing developing countries is not that of producing large “quantities” of technologically imitated goods to grow (something that could be achieved by many of the developing countries endowed with large shares of unskilled workers) but, rather, to “crack” the best ways to smartly adopt foreign technologies by minimizing the costs related to such adoption so as to be competitive in international markets vis a vis other technology adopters. This is far more difficult and can be achieved only by those countries that develop higher skills.

Second, some technologies are indeed more difficult to adopt than others but, at the same time, they are also the most profitable ones. The availability of these technologies for their adoption is intrinsically linked to the skills of each country’s workforce.

Increasingly more specialised workers are needed to adopt new innovations. Hard but also soft skills may be required in the adoption process (i.e. managerial and organisational skills are required to understand what innovations should be adopted in the first place to increase productivity of adopting firms)

Quoting Calmfors, Corsetti, Flemming et al. (2003) “[skilled] people may represent small numbers but have a critical economic significance”. Our results show that this applies especially to developing countries where skilled and trained workers are usually very scarce.

References:

Acemoglu D., P. Aghion and F. Zilibotti (2006). “Distance to Frontier, Selection, and Economic Growth”, Journal of the European Economic Association 4 (1), 37-74

Aghion P, Boustan L., Hoxby C., and Vandenbussche J. (2009), “The causal impact of Education on Economic Growth: Evidence from U.S.”, Brooking Papers on Economic Activity, spring.

Calmfors L., G. Corsetti, J. Fleming, S. Honkapohja, J. Kay, W. Leibfritz, G. Saint-Paul, and H-W. Sinn and Vives Xavier (2003) Report on the European Economy, 2003 (European Economic Advisory Group, with), CESifo, pp. 133.

Cerina, F, and Manca F.(2016)  ‘Catch me if you learn: development-specific education and economic growth’. Current version: Revised and resubmitted to Macroeconomic Dynamics.

Papakonstantinou M. (2014). “Composition of Human Capital, Distance to the Frontier and Productivity”, IARIW papers.

Pritchett, L. (2001). “Where has all the education gone?”. The World Bank economic review. — Vol. 15, no. 3 (September 2001), pp. 367-391.

Vandenbussche, J. Aghion, P. and Meghir, C. (2006). “Growth, distance to frontier and composition of human capital,” Journal of Economic Growth, 11: 97-127.