On the Aggregate and Distributional Implications of Productivity Differences Across Countries

52 Pages Posted: 7 Dec 2012

See all articles by Andres Erosa

Andres Erosa

University of Toronto - Department of Economics

Tatyana Koreshkova

University of Iowa - Henry B. Tippie College of Business - Department of Economics

Diego Restuccia

University of Toronto - Department of Economics

Date Written: February 1, 2006

Abstract

We develop a quantitative theory of human capital with heterogeneous agents in order to assess the sources of cross-country income differences. The cross-sectional implications of the theory and U.S. data are used to restrict the parameters of human capital technology. We then assess the model's ability to explain the cross-country data. Our quantitative model generates a total-factor-productivity (TFP) elasticity of output per worker of 2.8. This implies that a factor of 3 difference in TFP is amplified through physical and human capital accumulation to generate a factor of 20 difference in output per worker --- as observed in the data between rich and poor countries. The implied difference in TFP is in the range of estimates from micro studies. The theory suggests that using Mincer returns to measure human capital understates human capital differences across countries by a factor of 2. The cross-country differences in human capital implied by the theory are consistent with evidence from earnings of immigrants in the United States. We also find that TFP has substantial effects on cross-sectional inequality and intergenerational mobility and that public education policies can have important aggregate and distributional implications.

Keywords: output per worker, TFP, human capital, heterogeneity, inequality, mobility

JEL Classification: O1

Suggested Citation

Erosa, Andres and Koreshkova, Tatyana and Restuccia, Diego, On the Aggregate and Distributional Implications of Productivity Differences Across Countries (February 1, 2006). FRB Richmond Working Paper No. 06-02, Available at SSRN: https://ssrn.com/abstract=2186165 or http://dx.doi.org/10.2139/ssrn.2186165

Andres Erosa

University of Toronto - Department of Economics ( email )

150 St. George Street
Toronto, Ontario M5S 3G7
Canada

Tatyana Koreshkova

University of Iowa - Henry B. Tippie College of Business - Department of Economics ( email )

108 Pappajohn Building
Iowa City, IA 52242
United States

Diego Restuccia (Contact Author)

University of Toronto - Department of Economics ( email )

150 St. George Street
Toronto, Ontario M5S 3G7
Canada

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