Azariadis and Drzen (1990) model the
mechanism of human capital transmission across generation in the more plausible
framework of an overlapping generations model (Lucas followed Ramsey in the
simplifying assumption that households as well as firms are infinitely lived in
these models agents inherit the human capital accumulated by the previous
generation, they then decide how much time to devote to training a young
graduate in acquiring further skills in technology that increases labour
quality, thereby affecting their marginal productivity when older. Since a
given generation deciding its own human capital investment does not take into
account the inter temporal spill-over effect upon the human capital at the
social
level. This state of affairs could be ascribed to the impossibility of concentrating
with the future generations and sometimes is described as allocation
inefficiency due to “incompleteness of markets”. The sources of this problem
affecting human capital investment is therefore rather different from the set
of condition previously seen to impair the allocative effectiveness of markets
that do exist.
Aemoglu (1998) had offered a formal
demonstration of how positive spill-over effect (Pecuniary externalities)
created by workers educational and training investment decision can give rise
to macro-level increasing returns in human capital. His model supposes that
workers and firm make their investment in human and physical capital, respectively before being randomly
matched with one another. The direct consequences of random matching is that
the expected rate of return on human capital with which a worker will be
provided, similarly, the return on physical capital is increasing in the
average human capital that the firm expect the workers to bring to the job.
Hence an increase in education for a group of workers induces the firm to invest
more in tangible asset, thereby increasing the return to all worker in the
economy. Through a similar argument the model is seen also to imply that there
are “ social increasing returns” in physical capital.
In the early 1990’s pioneering
econometric studies (based on international panel data for a widely diverse
array of countries during the post-1960 era) provided empirical support for the
conclusion that human capital formation was among the factors that significantly
affected the aggregate level of rate of economic growth.
The found that success in the process of hatching of internationally in terms of GDP
growth was positively related to the overall social rate of human capital
formation.
Furthermore, the poor countries that
were tending to catch up with the higher income economies were restricted to
those that were maintaining levels of investment in formal education which were
high in relation to their receptive GDP levels.
More recent econometric studies have
yielded three robust empirical findings.
There is only weak empirical support of
the hypothesis that changes in the human capital stock affect growth rate.
There is strong spatial support for
the hypothesis that the relative level of the stock of human capital (in
relation to the labour force or aggregate out) has a positive effect on growth
rates)
The magnitude of the “level affect” of
the human capital stock is itself far from uniform across the distribution of
economies, the impact on growth rates does not vary linearly with the relative
size of the stock but, instead becomes proportionately smaller among the
economies where the average educational attainment is already high.
The broad interpretation of these
finding in the context of recent growth models is that raising the general level
of educational attainment interacts positively with other forces. Among them
the accumulation of complementary physical capital and the application of new
technologies. Higher human capital intensity thus permits countries to
accelerate their productivity growth rate and narrow the relative size of the
per capital real income gaps separating them from the leading economies.
Maintaining a high average level of
education attainments and correspondingly high rate of investment in other forms
of human capital (e.g. health, internal spatial and occupational mobility)
would appear to serve as a stabilizing force although not a guarantee-against
continuing secular decline in a country’s relative per capital income position.
Most of theoretical literature on education growth focuses on the role that
invest in formal education plays in modern economies