The Efficiency of Human and Physical Capital

Abstract:     
The unremarkable role assigned by the empirical macro literature to education to explain income growth is misleading, for it depends on a production function with a unit-elasticity of substitution between human and physical capital. An estimation exercise, in which variations in the ratio of the two types of capital ratio are regressed against movements in their relative prices, indicates that the elasticity of substitution is likely to be between 0.2 and 0.4, and almost surely far lower than one. A novelty of the experiment is the use of data on the cost of education as a proxy for the price of human capital.

This study implies that the microevidence on educational premia is consistent with the contribution of human capital to aggregate productivity. A crucial factor of the reconciliation is the finding that human capital has outperformed physical capital in the efficiency race. In particular, the data are shown to suggest that between 1965 and 1990 technical change has been biased in favor of human capital.

Number of Pages in PDF File: 42

Keywords: Elasticity of Substitution,Two-Sector Growth Model

JEL Classification: O11, O41, O47, O57

working papers series