introduction [to human capital and economic development]

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Upjohn Institute Press Book Chapters Upjohn Research home page

1994

Introduction [to Human Capital and EconomicDevelopment]

Sisay AsefaWestern Michigan University

Wei-Chiao HuangWestern Michigan University

This title is brought to you by the Upjohn Institute. For more information, please contact [email protected].

CitationAsefa, Sisay, and Wei-Chiao Huang. 1994. "Introduction." In Human Capital and Economic Development, Sisay Asefa, and Wei-Chiao Huang, eds. Kalamazoo, MI: W.E. Upjohn Institute for Employment Research, pp. 110.

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IntroductionSisay Asefa and W ei-Chiao Huang

WesternMichiganUniversity

Human capital, as viewed by economists, involves a process ofinvestment that enhances human labor productivity by means ofadvances in knowledge and its applications. It specifically involvesinvestment expenditures on education, training, health , nutrition, andrelated factors that increase the productivity of the labor force. NobelLaureate T . W. Schultz (1956) was one of the first economists to id entify the deficiency of the standard neoclassical production function in neglecting the critical role of human capital. More recent empiricalstudies of economic growth by Hagen (1980), Denison (1985), andJorgenson (1988), have show n that human capital in vestment hasmadea significant contributio n to theeconomic growth of in dustria l nationssuchas the United States. T he essays in the present volume explore thevarious national and international dimensions of humancapital anddevelopment ranging from the economic im plications of demographictrends in the United States (R ichard A. Easterlin), the effectofpopulation growth andhuman capital on development (D . Gale Johnson andJulian L. Simon), the relationshipamong human capital, the family,and economicdevelopment (MarkR. Rosenzweig), and the crucialissue of workplace training in th e United States (Peter B. Doeringerand Ann P . B artel).In the first essay, Easterlin begins by challenging B enjaminW atten-berg'sbook, TheBirth Dearth, w hich predicts a decline ofthe UnitedSta tes economy due to an aging population and low fertility over th enext century. Easterlin presents the rationaleoffered by Wattenbergand others for their pessimistic views about the economic effects offuture demographic trends of the United States. He makes the argumentthat these popular view s about the adverse effects of decliningpopulation growth on future economic development do not standup tolong-term his torical facts. In supporting his thesis, heexamines the his torical record of selected W esternin dustrial countries over the la st century. These data includedemographic variables such as the historical


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2 Introduction

relationships between population growth and economic growth, th esize of the total dependency burden (youth an d old age) in relation tothe rate of economic growth, the size and ag e of th e labor force, andthe implication for overall educational/human capital level of the laborsupply. Based on these demographic data over the last century foreleven Western industrial nations including the United States, Easterlinconcludes that the historical experience an d evidence raise seriousdoubt about the "secular stagnation thesis." H e notes that projecteddemographic trends are quite small by historical standards, and theprojected aging of the labor force is within the range of historical experience. He further contends that an y rise in old-age dependency will beoffset by declining youth dependency for the United States and Western industrial nations, and that the projected total dependency rates are,on average, similar to the late nineteenth century fo r these countries,thereby casting some doubt on the whole stagnation thesis. The levelin g of fertility below replacement level is not out of line with the dataon completed fertility in this century, according to Easterlin. Thesedata show long-term fluctuations of about half a century duration, an dthat the emerging labor market conditions seem to favor a newupswing; the data show a total fertility rate above the 1980 trough forall the countries examined. Easterlin points out that even the possibility of a new baby boom, dismissed by existing demographic projections, cannot totally be ruled out.In the next essay, Johnson takes up another aspect of human capital focusing on the value of a human being with little or no formalinvestment. His essay is relevant to low-income countries of the worldwith relatively lo w human capital investments of their populations. Inexamining the evidence on the effect of population growth on per capita l income growth of developing countries, Johnson challenges th epopular view of the negative relationship between population growthan d per capita income in developing countries, as advanced by the proponents of "the Population Bomb Thesis." H is essay summarizes someof th e major findings of a working group organized by th e NationalResearch Council of the National Academy of Sciences, which is alsocritical of the pessimistic view about the effects of population growthon economic growth of developing countries. Johnson presents threeempirical propositions that cast serious doubt on th e commonly heldview about th e negative relationship between per capita income and


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Introduction 3

population growth. First, significant increases in per capita income inWestern industrial nations occurred between the eighteenth an d twentieth century when their populations were also rising rapidly and lifeexpectancy was increasing. Second, developing countries achievedhigher per capita income, a rise in life expectancy, and reduced infantmortality since about 1950, when population growth began to rise rapidly. Specifically, Johnson points out the fact that between 1950 an d1980 developing countries experienced a rapid population growth ofover 2 percent, paralleled with per capita income growth of 2 .6 percent. Third, he presents evidence from regression results based oncross-country data that show no significant relationship between po pulation growth an d economic growth. According to Johnson, other variables such as economic policy, may be more important than populationan d human capital variables included in these results. He supplementsthis view by referring to recent empirical evidence by Levine andRenelt (1992) which presents results on th e effect of various policyfactors and population growth on the economic growth of 119 countries. None of th e regressions showed a significant relationshipbetween population an d economic growth. Thus, Johnson makes th epoint that much of the human suffering in developing countries overthe years has been caused by nonpopulation growth factors such ascivil wars, state policy failure, an d economic mismanagement. Johnsonalso summarizes some findings related to nine questions that came outof the NRC report on population growth an d economic developmentthat deal with the effect of population growth on the supply of exhaustible an d renewable resources, environment, worker productivity, levelsof schooling and health, income inequality, rural-urban migration, andsocial costs of fertility. He concludes that there is little evidence fromthis report "to support the position that a family imposes negativeexternalities on society when it chooses to have another child." H equalifies his argument, however, by pointing o ut that a very high population gro wth in excess of 3 percent in the short run, "may reduce ratesof per capita income growth primarily due to the stress placed on institutions such as education, health, and city public services," an d soNRC's evidence is more relevant to a moderate population growth rateof 1.25 to 2.5 percent. Governments of developing countries should,according to Johnson, pursue social an d economic programs such asprimary education, maternal an d child health care, and social security


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4 Introductio n

programs that have th e external effect of reducing population growth .H e concludes his essay by presenting a rationale fo r what he calls"positive population policy," w hose aim is to assist "every family in acountry to have th e num ber of children each family desires" withoutcoercion. For such a policy to materialize, governments must providerelevant information, including contraceptive m aterials and services, toevery household on a voluntary basis.Rosenzweig 's essay explores the relationship among human capital,th e family, and economic development. H e examines tw o relatedaspects of this complex relationship. First, whether family relationships and stability are relate d to the rate of economic growth. Second,how economic developm ent affects the level and returns to investmenton human capital. Realizing that th e study of these relationships is acomplex task in th e context of a modern industrial econom y such asth e United States, he bases his analysis on data from th e simpler(developing) economy of rural India. He uses tim e-series data thatdescribe farm household behavior under traditional technology andcross-section data on farm ers across India before and after th e greenrevolution technical change. He organizes his essay by first discussingsome key features of a traditional agrarian economy before technicalchange, including th e relationship between family stability and humancapital under this setting. After examining his data on th e features of atraditional economy, he includes some evidence on specific hypothesesabout the relationship betw een human capital and fa mily structure w ithemphasis on risk-mitigatio n and experience as important elements ofhuman capital. Rosenzweig then examines how technical changeaffects human capital investments and family structure, and drawssome possible policy implications. According to Rosenzweig, experience (learning by doing) is th e m ost valuable fo rm of hum an capitalunder traditional static technology. Consequently, education whichenables farmers to acquire knowledge outside such environment, provides little or no return. It follows that th e elders have th e largestamount of human capital and respect, resulting in family stability andintergenerational interdependence. The introduction of technicalchange, however, reduces the value of past experience and erodes family ties, which leads to family breakups and instability even though therate of return from formal schoolin g m ay increase. Thus, according toRosenzweig, technical change can have a destabilizing effect on the


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Introduction 5

family by reducing returns fromexperience, by decreasing the role ofrisk-spreading arrangements among family members, and by weakening coping mechanisms in an uncertain traditional economic environment. Another important policy implication that he draws from thesefindings is that a significant decline in fertility in growth areas relativeto other areas of India was achieved without any direct intervention bythe government, indicating that such efforts are unnecessary in an environment of continuous technical change and economic growth.In the fo llowing two essays, Doeringer and Bartel both deal with theissue of workplace training in the United States. Doeringer's essay isconcerned with whether the workplace training system of the UnitedStates will survive international competition. He points out that thecrux of the nation's human capital deficiency problem may not be dueto its schools, and that educational reform may not be central to solvin g the problem, especially in the short run. Instead, he notes, the problem may be rooted in the weakening of the nation's workplace systemfor raising labor productivity, which he defines broadly to includeeffort, commitment, problem-solving capacity, and job skills.Doeringer's view is that while educational improvement may be animportant part of a long-term solution, it is unlikely to rebuild the productive capacities of the present workers who are already out of schooland who will constitute two-thirds of the labor fo rce during the nextdecade.

Doeringer further examines some features and experiences withsuch alternative systems of workplace training in the United States asthe Fordist system, the high-commitment system, and the low-wage,Employment-at-Will System. The traditional Fordistsystem involvesraising productivity through "soft bargains" reached collectivelybetween labor and management. The high-commitment system emphasizes individual rather than collective effort bargains to encourage theindividual worker to internalize the goals and objectives of the company and to take action to achieve these goals. The employer in returnprovides intensive career training and development, fa ir compensation,and an implicit guarantee of permanent employment, with a result ofcontinuous im provement in productivity and career earnings. The relatively new employment-at-will system allows firms to keep wages aslow as market competition will allow, with an indefinite period ofemployment that quickly adjusts to changing labor m arket conditions,


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6 Introduction

with no commitment from employers and no expectations of job security by workers. H e observes that such firms do not invest on humancapital development an d do not depend on effort bargains, but rely onmarket incentives to motivate training investments and effort.Doeringer's essay is also concerned with th e evolution of workplacetraining systems an d their effects on productivity. H is view is that it isan open question whether the traditional F ordist an d high-performanceworkplace systems will survive in some form in the future labor market or if the low-wage, employment-at-will model will prevail.Bartel analyzes another dimension of the issue of workplace trainin g in the United States. Her essay is concerned with whether American workers are getting sufficient on-the-job training or if workplacetraining is underproduced. S he explores this question by reviewingdata av ailable on the amount of training received by U.S. workers relative to other industrial countries, by examining data on the rate ofreturn to investments in on-the-job training, by evaluating alternativesuggestions to alleviate the underinvestment problem, and finally bydiscussing her own research findings about the relationship betweentechnological change an d training.Bartel identifies tw o general sources of data, based on surveys ofindividual workers and employers, to study workplace training. Shenotes that both types of data report underinvestment. Even though theNational Longitudinal Surveys of Mature Men, Young Men, YoungW omen, an d Youth (NLSY) are the best employee-based sources ofdata, according to Bartel, these data have some measurement problems, as they do not measure informal training. Informal trainingappears to be quite important for U.S. workers, since it is found tooccur at the same rate as formal training programs.Bartel's essay also examines comparative training systems in threeindustrial countries: Germany, France, an d Japan. The German system,which is based on an apprenticeship contract signed between a company and the government, is to o rigid and narrow. Thus, it cannot beshown that German workers are better or more trained than Americanworkers if the various dimensions of training are considered. T heFrench system relies on a mandated training tax where employers often or more workers must spend a certain proportion of their labor coston continuous education an d training of employees or pay tax equal tothe required amount minus the actual training expenditures. It cannot


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Introduction 7

beconcluded that American workers receive less training thanFrenchworkers because, while the training incidence is higher in France, itslength is much shorter. Finally, the Japanese training system appliesonly to large firm s thatemploy only one-thirdof the workforce. Themajority of the workforce is employed in small firms where employment is not guaranteed and very little training is done.W hile the comparative data do not provideanyconclusive evidenceto confirm relative underinvestment, Bartel uses the rate of return datato reach"a conclusion that there is underinvestm ent in job training" inthe United States. She thenexplores somepossible causes of underinvestment, such as higher relative turnover rate, inability of theemplo yer to evaluate the quality of applicants ' general skills, minim umwage constraint, and inability of young workers to pay for their owntraining.Bartel addresses themerit of alternative policy options to increaseinvestmentin training, including government-provided training, payroll-basednational training tax imposed on employers, and subsidiesand incentives for employees from the government. She notes thatthese options, especially the first tw o, aregenerally inadequate.Finally, Bartel examines the issue of trainin g in relationto technological change and concludes, based on her own research, thatemployee training will incre ase as a sim ple by-product of technolo gical change during the next decade. In sum, her essay shows that whilethe high rates of return to trainingmay be consistent with a possibleunderproductionof train ing in the United States, technological changewill increase the in centives for investm ent in training, thereby requirin g no external government interference with the marketfor labortraining.The final essay by Sim on addresses the is sue of the very-long-runeffect of human capital on economic progress. Simon's essay is in thetradition ofhis provocativeand often controversialviews on the effectof population oneconomic development. The basicquestion addressedin his present essay deals with "thecause of so many of the world'spopulationnow being long-livedand endowed with much wealthan d ahigh standardof living, with an even larger pro portion likely to enjoythese benefits in the coming decades," compared to severa l centuriesago. In other words, he queries"why the rapid progress of the past tw ocenturies did not begin centuries or millennia earlier. ...Was there


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something extraordinary about the human numbers or the level of technology in 1700 or so?" His answer is simply that today's technology isthe su m of increments of knowledge in the past, and th e additionalknowledge was produced by people and therefore must have beeninfluenced by human numbers. He adds that other possible factors suchas culture, politics, and economic and social systems are also influenced by numbers. Thus, Simon's basic hypothesis is that the size ofhuman population as measured by population density an d number ofpeople combined with the technology produced by them is the rootcause of the speed of economic progress. It is his view that had population been frozen at th e level of some 10,000 years ago, economicprogress would not have reached the present state. His basic rationaleis the obvious notion that if there were more people there would bemore human capital to create knowledge that leads to economicgrowth. Simon's essay provides some evidence in support of what heterms "population-induced social change" by reviewing some sketchytime-series an d cross-sectional data on the relationship between population an d rate of economic growth and between popu lation an d naturalresource availability, including some evidence on the relationshipbetween population an d structural factors that affect the rate of ec onomic growth. Simon's basic premise is that higher density an d largerpopulation were, historically, necessary conditions for economicprogress. Whether they were sufficient depends on the nature of particular societies, which have also been capable of retrogressing with po pulation growth. While he supports the basic Malthusian proposition asrelevant in the short-run subsistence economy under static technology,Simon's model refers to the very-long-run effects of population growthas the only exogenous variable, while other variables, such as institutions an d technology, are all endogenously determined. This leads toone of his major points, that "no other element was as essential as thecombination of knowledge an d population numbers" in the very longrun. Thus, Simon's proposition is that human economic progress is afunction of population numbers, and all related social an d economicdimensions are a function of population size and density in the verylong run. He reinforces this view by reviewing some historical ev idence about how more people bring about more ideas, more knowledge, expanded markets an d cities, and higher productivity an d incomeover the long run. H e notes that even the spread of diseases has been


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In troduction 9

positively influenced historically by population, as for examplea moredense population reduced the "virulence of mass killers" such asmalaria by practicin g intensive cropping.Finally , w e are impressed w ith the quality and insights of the essaysresulting from this le cture series. The individual authors present a complementary and well-integrated approach that challenges conventionalwisdom and views about the various dimensions of human capital andeconomic development from th e domestic and international perspectives. O ur aim in this introduction w as to highlight some of the criticalissues discussed. W e invite th e reader to explore the details and thefuller context of th e various aspects of the subject in th e chapters thatfollow.


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References

Denison, E.F. 1985. Trends in American Economic Growth. Washington, DC :Brookings Institution.Hagen, E.E. 1980. The Economics ofDevelopment. Homewood, IL: Irwin.Jorgenson, D.W. 1988. "Productivity and Post-War U.S. Economic Growth,"

Journal ofEconomic Perspectives 2 , 4 (Fall): 23-41.Levine, Ross, and David Renelt. 1 9 9 2 . "A Sensitivity Analysis of Cross-Country Growth Regressions," American Economic Review 82 , 4: 942-63.Schultz, T.W. 1956. "Reflections on Agricultural Production, Output, and Supply," Journal ofFarm Economics 38: 748-62.

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