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Economic Freedom, Human Rights, and the Returns to Human Capital: An Evaluation of the Schultz Hypothesis

45 Pages Posted: 20 Apr 2016  

Elizabeth King

World Bank - Development Research Group (DECRG)

Claudio E. Montenegro

World Bank Group; Universidad de Chile, Economics Department

Peter F. Orazem

Iowa State University - Department of Economics; IZA Institute of Labor Economics

Date Written: August 1, 2010

Abstract

According to T.W. Schultz, the returns to human capital are highest in economic environments experiencing unexpected price, productivity, and technology shocks that create "disequilibria." In such environments, the ability of firms and individuals to adapt their resource allocations to shocks becomes most valuable. In the case of negative shocks, government policies that mitigate the impact of the shock will also limit the returns to the skills of managing risk or adapting resources to changing market forces. In the case of positive shocks, government policies may restrict access to credit, labor, or financial markets in ways that limit reallocation of resources toward newly emerging profitable sectors. This paper tests the hypothesis that the returns to skills are highest in countries that allow individuals to respond to shocks. Using estimated returns to schooling and work experience from 122 household surveys in 86 developing countries, this paper demonstrates a strong positive correlation between the returns to human capital and economic freedom, an effect that is observed throughout the wage distribution. Economic freedom benefits those workers who have attained the most schooling as well as those who have accumulated the most work experience.

Keywords: Debt Markets, Political Economy, Economic Theory & Research, Labor Policies, Population Policies

Suggested Citation

King, Elizabeth and Montenegro, Claudio E. and Orazem, Peter F., Economic Freedom, Human Rights, and the Returns to Human Capital: An Evaluation of the Schultz Hypothesis (August 1, 2010). World Bank Policy Research Working Paper No. 5405. Available at SSRN: https://ssrn.com/abstract=1669105

Elizabeth King (Contact Author)

World Bank - Development Research Group (DECRG) ( email )

1818 H. Street, N.W.
MSN3-311
Washington, DC 20433
United States

Claudio E. Montenegro

World Bank Group ( email )

1818 H. Street, N.W.
MSN3-311
Washington, DC 20433
United States

Universidad de Chile, Economics Department

Diagonal Paraguay 257
Torre 26, Of. 1801
Santiago
Chile

Peter Francis Orazem

Iowa State University - Department of Economics ( email )

260 Heady Hall
Ames, IA 50011
United States
515-294-8656/515-294-7740 (Phone)
515-294-0221 (Fax)

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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