Schooling and Training

Countries can build up their human capital through schooling and training. They can also build up their human capital by attracting skilled workers from other countries. If richer countries are able to attract skilled workers, then we will see divergence rather than convergence. [6] Turning to technology, divergence in social infrastructure is certainly a possibility. Social infrastructure includes the rule of law, the general business climate, social attitudes toward corruption, the protection of property rights, and many other intangible factors. These influences on economic growth are difficult to define and almost impossible to measure accurately. Yet economists are convinced that successful economies must have a good set of such social institutions. It is likely that it is easier to build and improve such institutions in countries that are relatively prosperous, which would again lead richer countries to grow more rapidly than poorer countries. Economists have built some of these ideas into the theoretical framework of economic growth. Unfortunately, the models are too complicated for an introductory economics textbook, so we will not go into them in any detail here. We can, however, provide a simple example that conveys the flavor of these more complex ideas. The story goes as follows. We know that workers acquire human capital through education and on-the-job training. Suppose that, when there is more physical capital in the economy (relative to the number of workers), it is easier to acquire human capital. You can study in modern facilities with up-to-date computers. You work with state-of-the-art machinery and become more skilled. In this story, human capital is endogenous: it depends on the amount of physical capital. To be concrete, imagine that technology is constant, and the amount of human capital is proportional to the amount of physical capital per worker. When we incorporate this assumption into the production function, we end up with a very straightforward relationship: output = B × physical capital, where B is just a number. [7] In this economy, the ratio of capital stock to GDP is constant at all times (capital/output = 1/B). This economy is always on a balanced-growth path. Because of this, the growth rate of output equals the growth rate of capital stock: output growth rate = physical capital growth rate. The more important point, though, is that this technology does not exhibit diminishing marginal product of capital. The marginal product of capital is constant: it equals B. If this number were different in different economies, then we would expect to see capital stock flowing from economies where B is small toward economies where B is large. We would see divergence rather than convergence. The model that we have described in this subsection is simplistic. Its point is simply to show that, if we make human capital endogenous, it is much easier to explain divergence.