Human Capital “Puzzle” Explained?

Today is Capital Day again, a day to celebrate physical, social, and especially human capital, the added productivity from experience and training. 

Human capital offers an interesting case study in theory versus data.  Just as most people think it obvious that medicine deserves most of the credit for health gains, most people think it obvious that education deserves most of the credit for human capital gains.  Do-gooders the world over have for centuries "known" that what the poor really need is more medicine and education (and religion and art). 

We theorists will tell you that, yes productive people tend to be better educated, but there are many possible explanations for wealth-education correlations.  For example, schooling could be a credible signal of ability, or school could be consumption that the rich can better afford. 

Most who study education are data-crunchers with little patience with such abstract theorizing.  But until recently they were troubled by the fact that data on nations across time seemed to show a negative relation between wealth and education, even after controlling for measures of physical capital!  For example, see this 2001 Pritchett paper.

In the last year, however, education data-crunchers have declared with satisfaction that the problem is now solved, since new data now shows a positive correlation across nations between education and wealth.  See this recent Science paper, which controls (only) for fixed effects in years and nations:

Previous cross-country economic growth regressions tended to show that changes in educational attainment are largely unrelated to economic growth [for example, (5, 6)], which contradicts theory and microeconometric evidence. Most of the literature in this field attributes the existence of this puzzle to deficiencies in the series of education data (3, 4, 7). … Using our new educational attainment data by age groups, … The results show consistently positive, statistically significant education effects on economic growth for some age and education groups (9) and, hence, make the puzzle disappear. …

and this 2007 Journal of Economic Growth paper, which controls (only) for physical capital:

We present a new data set for years of schooling across countries for the 1960 – 2000 period. … In standard cross-country growth regressions we find that our series yield significant coefficients for schooling. … even when the regressions account for the accumulation of physical capital. … These results differ from the typical findings of the earlier literature and are a consequence of the reduction in measurement error in the series. 

However, this paper admits:

It is important to highlight that these regressions can be criticized for a number of reasons. Namely, several variables that may affect growth are omitted from the regressions and so the estimates presented here may be biased in any direction.

Indeed – it seems way too early to conclude that the "puzzle" has been solved based on regressions with so few controls. (Health regressions usually have far more control variables.)   Health and education seem to me areas where intuitive theoretical presumptions are so strong that it takes a theorist to resist them – empiricists remain in firmly their thrall. 

Added:  There is plenty of data available about other control variables across nations and time, and I’m very sure these researchers are well aware that adding many controls is a very standard practice in related fields.  So I must suspect that the reason for not including controls in this studies is that the desired effects go away when controls are added. 

GD Star Rating
Tagged as:
Trackback URL:
  • Robin, are you ever going to do a post that goes something like “Politicians frequently suggest that letting rich people get even richer is a small price to pay for higher economic growth; however, there has usually been very little data to support this. In fact, here’s a study that suggests the opposite”?

    It’s always “If you torture the data enough, NO HEALTH INSURANCE FOR YOU!!” or (like this one) “Here’s some data that disagrees with me; perhaps I’ll decide it’s no good? That’ll do it!”

  • Alex, I’ve never heard a politician say that, though I agree there is little clear data to support it. I comment on what I notice, and I haven’t seen much on that subject.

  • Will Pearson

    Alex, is the trickle down economy model, what you are talking about?

  • Constant

    Alex could be talking about many things. For example, he might be saying that liberalizing the Cuban economy would benefit only the wealthiest Cubans while leaving the vast majority of Cubans at the current level of poverty. Something like that.

  • Robin, are you going to do regressions with more controls?

  • Maksym Taran

    “If you torture the data enough, NO HEALTH INSURANCE FOR YOU!!”

    Thank you! That was the funniest thing I’ve read on a blog in months.

  • Floccina

    A few points:

    Education, skills and knowledge seem to me to be very valuable in general but schooling is only valuable to the individuals who do better than average and to a certain extent to employers for grading people. IMO schooling is more about testing than teaching. If one looks at school objectively it seems that one would come to this conclusion. School helps with some useful skills like reading and arithmetic but it teaches very little information that will be useful to the students in life. Students would seem to better of watching myth busters than in a class.

    Richard Vedder has found that the statistics by state shows that those states that increase education spending faster have slower economic growth than similar states that increase education spending slower.

    The un-schoolers are matching schools with minimal instruction and input.

    It seems that if a child does not want to learn and if his parents do care if he learns or not, the child will not learn in school or out of school.

  • Floccina

    More education spending means more taxes and maybe less spending on physical capital. In a diminishing returns case should we not all agree that at some point spending on education would have a negative effect on economic growth? So then the argument is about at what point we go negative not if we ever go negative.

    If you look at individuals, I am convinced that some students would be much better off if the money spent to school them was instead spent on physical capital that was then given to them. A poor student with 12 years of schooling will generally do less well that a poor student with 3 years of schooling and his own bulldozer and trailer to carry it to jobs.

    Most children, with individual instruction, can be taught to read, write and do addition, subtraction, multiplication and division in a very short period of time. So the returns on further instruction may start to decline rapidly a very low level of instruction.

    If human brains take up information at a fixed pace is it not possible that the useless information that we learn in school in order to make the grade squeezes out some other learning that might be more valuable in our lives? Rather than trying to teach children more maybe we should try to teach them more useful things.

  • TGGP, that isn’t in my plans.

    Floccina, your views are plausible, but so are opposite views. We need clearer data to distinguish them.

  • Hal

    Seems like this debate like many others boils down to a rather arcane dispute over the use of statistics. The questions of what variables should be dependent or independent, which should be controlled in regression analysis, and so on are technical and important but relatively opaque to those who have not mastered these tools.

    Last week the TierneyLab NY Times blog wrote about a paradoxical result where the more lay people viewed themselves as informed about global warming, the less concerned they felt on the issue. Reading the paper linked from the blog revealed that this was not the only paradoxical result. Contrary to previous findings in the literature, the study found greater levels of global warming concern among white males versus females and minorities. And even more surprisingly, they found greater levels of concern among Republicans than among Democrats!

    The answer seemed to be a control variable introduced in the analysis tied to “ecological values”. Controlling for this element gives you backwards results for many other variables that would be correlated with that attribute. This can seemingly explain most or all of the surprising results from the analysis.

    Is this a valid technique? Or bad use of statistics? I can’t say but it does illustrate how important it is to understand the details of how things are being analyzed in order to put the results into perspective. And it further illustrates how opaque and esoteric these matters become, especially problematic for issues that impact on the larger world of politics and policy.

  • Hal, yes, it requires expertize in statistics to evaluate claims of statistical analyzes. Prediction markets might cut through this cloud, at least to some extent.

  • M-J salehi

    dear sir
    I am student and i have a request.I want new BARRO & LEE statistic about HUMAN CAPITAL or every statistics that you think i can use it.please send them for me.
    sencerely yours