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 adressed.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, 1987, 1990) and includes contributions by (Grossman andHelpman, 1991) and (Agion and Howitt, 1992). (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 Werner, 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.(Barro,2001) studied education’s effect and found a strong impact. He reported thathigh ratio of human capital tends to generate higher growth through twochannels, firstly through more absorption of physical capital due to lowerlabor to capital ratio and secondly due to efficient adjustment of physicalcapital. Thereare many issues which could lead to inconsistent estimation of health’s effecton economic growth.
Firstly and the most major problem, is that health ismeasured in different ways, different proxies are used to measure health.Secondly there is a problem of inconsistent data, this is because there isevidence of adult cognition and production efficiency affected by theirchildhood health. Thirdly there is a case for causality, so it is possible thatincome affects health and health affects income so it becomes difficult tomeasure.Soa solution to this measure difference is to address the root cause fordifference in adult health indicators. There is consistence in the health datacollected about children which very strongly influences adult health.
This was seenby (Case, Fertig, and Paxson, 2005) who used education and parental influences toshow childhood health has a strong impact on adult health. (Schultz, 2002) regressesadult height with childhood health and nutrition to argue that each centimetergain in height due to improved inputs as a child in Ghana and Brazil leads to awage increase of between 8 and 10 percent. Another solutioncould be to derive data ourselves using quasi-experiments.
(Thomas andFrankenberg, 2002) advocated this approach. (Bleakley, 2003) studied theeffects of the eradication of hookworm and malaria in the United States in the1910s and 1920s. Controlling for normal wage gains in areas that were notinfected, showed that children who were born after eradication had higher wagesas compared to children born before eradication. However the rate of returnswhich can be achieved due to investment in health is not addressed.