Western University EconomicsWestern Social Science

Human Capital, Development, and Growth

Human Capital, Development, and Growth

1. Education Policy in Sub-Saharan Africa

Elizabeth Caucutt and Krishna Kumar argue that the case for universal compulsory education for sub-Saharan Africa may have been overstated. They develop a heterogeneous-agent model in which high costs of education relative to income and the skill premium cause the economy to stagnate in a low steady state with minimal educational attainment. A model calibrated to available data from a set of sub-Saharan African countries is used to show that a tax and in-kind subsidy scheme that effectively redistributes resources from households with lower ability children to those with higher ability children outperforms enrollment-maximizing policies such as the abolition of child labor and compulsory education.

Related Publications and Working Papers:

Caucutt, Elizabeth M. and Krishna B. Kumar, "Education for All: A Welfare-Improving Course for Africa?," Review of Economic Dynamics, 10 (2) 2007: 294-326.

2. Tax Policy, Human Capital, and Economic Growth

Understanding the relationship between taxation, skill accumulation and growth is important for policymakers. Elizabeth Caucutt, Selahattin Imrohoroglu, and Krishna Kumar (2006) develop a general equilibrium model of endogenous growth with heterogeneity in income and tax rates in order to study the effect of tax progressivity on economic growth. They show that changes in the progressivity of tax rates can have positive growth effects even in situations where changes in flat rate taxes have no effect. Interestingly, progressive taxation, usually thought of as a policy that reduces inequality, can actually increase the skill premium in the long run and decrease the upward mobility of the poor. Caucutt, Imrohoroglu, and Kumar (2003) investigate these relationships quantitatively by studying a calibrated version of the model. Experiments indicate that the quantitative effects of moving to a flat rate system are economically significant. The assumption made about the engine of growth – an external effect arising from production activities of skilled workers or intentional employment of skilled workers for research and other productivity enhancing activities -- has an important effect on the impact of a change in progressivity. Welfare is unambiguously higher in a flat rate system when comparisons are made across balanced growth equilibria; however, when the costs of transition to the higher growth equilibrium are taken into account, only the currently skilled slightly prefer the flat rate system.

Related Publications and Working Papers:

Caucutt, Elizabeth M., Krishna B. Kumar and Selahattin Imrohoroglu, "Does the Progressivity of Income Taxes Matter for Human Capital and Growth?," Journal of Public Economic Theory, 8(1) 2006: 95-118.

Caucutt, Elizabeth M., Selahattin Imrohoroglu and Krishna B. Kumar, "Growth and Welfare Analysis of Tax Progressivity in a Heterogeneous-Agent Model," Review of Economic Dynamics, 6 (3) 2003: 546-577.

3. Documenting and Explaining Inequality in China

In recent decades levels of education in China have increased, but the increases have been uneven. Educational outcomes have improved more rapidly in some regions and more slowly in others, with the consequence of widening regional inequality in educational attainment and income. As part of an international collaboration, the China Household Income Project, Terry Sicular and co-authors document the evolution of inequality and poverty in China, with attention to inequality of education.

Related Publications:

Sicular, T. The Challenge of High Inequality in China.  Inequality in Focus 2 (2).  1-5. (Poverty Reduction and Equity Department, World Bank, August 2013.

Li Shi, Hiroshi Sato and Terry Sicular (Editors), Rising Inequality in China: Challenges to a Harmonious Society, New York, New York: Cambridge University Press, 2013.

Li, Shi, Hiroshi Sato, and Terry Sicular. "Introduction: Rising Inequality in China," in Li Shi, Hiroshi Sato and Terry Sicular, eds., Rising Inequality in China: Challenges to a Harmonious Society, New York: Cambridge University Press, 2013.

Li, Shi, Chuliang Luo, and Terry Sicular. "Overview: Income Inequality and Poverty in China, 2002-2007," in Rising Inequality in China: Challenges to a Harmonious Society, Li Shi, Hiroshi Sato and Terry Sicular, eds., New York: Cambridge University Press, 2013.

Knight, John, Terry Sicular, and Ximing Yue. "Educational Inequality in China: The Intergenerational Dimension." In Shi Li, Hiroshi Sato and Terry Sicular, eds., Rising Inequality in China: Challenges to a Harmonious Society, New York: Cambridge University Press, 2013.

Luo, Chuliang and Terry Sicular. "Inequality and Poverty in Rural China," in Li Shi, Hiroshi Sato and Terry Sicular, eds., Rising Inequality in China: Challenges to a Harmonious Society, New York: Cambridge University Press, 2013.

Sicular, Terry, Yue Ximing, Björn Gustafsson, and Li Shi. "How Large is China’s Urban-Rural Income Gap?" In Martin K. Whyte (ed.), One Country, Two Societies: The Urban-Rural Dichotomy in Contemporary China, Cambridge, MA: Harvard University Press, 2010.

Gustafsson, Björn, Li Shi and Terry Sicular (Editors). Inequality and Public Policy in China. New York, New York: Cambridge University Press, 2008.

Press References:

"China's Widening Economic Fault Lines," Peter Cai, China Spectator, July 28, 2014.

"Beware the Middle-Income Trap: China's Roaring Growth Cannot Last Indefinitely," The Economist, June 23, 2011.

4. Education and Inequality in China: The Intergenerational Dimension

With Ximing Yue and John Knight, Terry Sicular, using cross-section household survey data with matched information about parents and children from the 2007 China Household Income Project examines how the intergenerational transmission of education has changed from the Maoist through the post-Mao era, and the extent to which this has contributed to inequality in the distribution of education.

Related Publications:

John Knight, Terry Sicular and Ximing Yue, "Educational Inequality in China: The Intergenerational Dimension," in Li Shi, Hiroshi Sato and Terry Sicular, eds., Rising Inequality in China: Challenges to a Harmonious Society, New York, New York: Cambridge University Press, 2013.

5. Public Spending and Private Behavior: Explaining Child Schooling in Rural China

Many studies have blamed inequality in educational attainment on China’s decentralized fiscal system. Local fiscal revenues vary substantially and are correlated with the level of local development. In the absence of adequate equalization transfers, differences in local revenues cause differences in expenditures, with consequences for the provision of public services like education. In the early 2000s the Chinese government announced a commitment to eliminate all charges on rural students for compulsory nine-year education, and then substantially increased fiscal transfers to rural areas so as to fund universal free compulsory education for the first nine years (primary plus junior middle school). In current work with coauthors Juan Yang and Desheng Lai, Terry Sicular is analyzing how recent changes in rural education policies and increases in public education funding have affected household educational investments and the educational attainment of rural children, using the 2002 and 2007 China Household Income Project survey data.

Related Publications:

Terry Sicular, Juan Yang and Desheng Lai, "The Changing Determinants of High School Attainment in Rural China," China Economic Review, 30 2014: 551-566.

6. Local Human Capital and Productivity Spillovers in Developing Economies

In a series of papers, Timothy Conley empirically estimates the importance of network effects and spillovers in developing countries. In work with Frederick Flyer and Grace Tsiang, he examines whether spillovers from local market human capital are important in explaining the distribution of productivity across Malaysia. This research develops an empirical method for describing local human capital distributions based on the idea that spillovers are limited in scope by costs of interaction or economic distance between agents. Estimates of the economic distance between agents are used to construct measures of local market human capital based on schooling rates of the population within a given radius. These measures are then used in estimating equations obtained from a simple local public goods model, allowing for general spatial correlation across observations as a function of economic distance. The estimates suggest positive wage and rent differentials associated with local human capital, consistent with productive human capital spillovers. In research with Christopher Udry, Conley investigates the role of social learning in the diffusion of a new agricultural technology in Ghana using unique data on farmers’ communication patterns to define information neighborhoods. Their estimates suggest that farmers adjust their inputs to align with surprisingly successful 'information neighbors'. Additionally, the relationship of these input adjustments to experience indicates the presence of social learning.

Related Publications and Working Papers:

Conley, Timothy, and Christopher Udry, "Learning About a New Technology: Pineapple in Ghana," American Economic Review, 100(1), 2010: 35-69.

Conley, Timothy, Frederick Flyer and Grace Tsiang, "Spillovers from Local Market Human Capital and the Spatial Distribution of Productivity in Malaysia," Advances in Economic Analysis and Policy, 3 (1), Article 5, 2003.

7. Asian Growth and Intersectoral Labour Transfers with Endogenous Effort

John Whalley and Madanmohan Ghosh examine whether strong Asian growth performance can be explained by intersectoral transfers in labour from the agricultural sector to the modern/industrial sector. Using Lewis-type models, they analyze the growth processes in Thailand and South Korea between the 1960s and 1990s. Their results suggest significant contributions to growth from intersectoral labour transfers in Lewis-type models with endogenous effort, and negligible contributions when effort is assumed to be exogenous.

Related Publications and Working Papers:

Ghosh, Madanmohan, and John Whalley, "Endogenous Effort and Intersectoral Labour Transfers Under Industrialization," Journal of Economic Integration, 22(3) September 2007, pp. 461-481.

8. Understanding Regional Inequality in China

In a series of papers, John Whalley and co-authors examine different dimensions of and explanations for urban-rural inequality in China. In research with Shunming Zhang, Whalley uses simulation methods to study the effects of Hukou migration restrictions on regional inequality. Their results suggest that flexible urban house prices retard rural-urban migration and reduce the impacts of removing Hukou restrictions on migration. Furthermore, incorporating labour productivity differences across regions further dampens the effects of eliminating Hukou migration restrictions, but greater mobility would still reduce inequality. In research with Xiaoyun Liu, Xiuqing Want and Xian Xin, Whalley assesses the impacts of technological change on China's regional disparities using a general equilibrium model of multiple regions and multiple sectors. Their results suggest that neutral technological change reduces China’s regional disparities, while biased technological change increases those disparities. Overall, they find that the latter has dominated from 1987 to 2000, suggesting that China’s technology changes over that period have increased regional disparities. Finally, in work with Ximing Yue, Whalley examines the effects of accounting for income volatility in measuring inequality in China. Available data indicate a growing ratio of mean urban to rural incomes from around 1.8 in the late-1980s to over three today, but these estimates do not take into account the higher volatility of rural incomes in China, which increases the effective urban–rural income gap and intensifies poverty concerns. Using Chinese longitudinal survey data, Whalley and Yue make adjustments for certainty equivalence of rural household income streams. Depending upon assumed levels of risk aversion, the measured urban–rural income gap increases by 20–30% using a certainty equivalent measure to adjust rural incomes for volatility. Using consumption data, they calculate similar (but slightly larger) increases.

Related Publications and Working Papers:

Liu, Xiaoyun, Xiuqing Want, John Whalley, and Xian Xin, "Technological Change and China's Regional Disparities: A Calibrated Equilibrium with Analysis," Economic Modelling, forthcoming.

Whalley, John, and Ximing Yue, "Rural Income Volatility and Inequality in China," CESifo Economic Studies, 55(3-4) September-December 2009, pp. 648-668.

Whalley, John, and Shunming Zhang, "A Numerical Simulation Analysis of (Hukou) Labour Mobility Restrictions in China," Journal of Development Economics, 83(2) July 2007, pp. 392-410.

9. Changes in Higher Education in China

John Whalley and co-authors document the major transformation of higher education underway in China since 1999 and evaluate its potential global impacts. Reflecting China's commitment to continued high growth through quality upgrading and the production of ideas and intellectual, this transformation focuses on major new resource commitments to tertiary education and also embodies significant changes in organizational form. This focus on tertiary education differentiates the Chinese case from other countries who at similar stages of development stressed primary and secondary education. The number of undergraduate and graduate students in China has grown at approximately 30% per year since 1999, and the number of graduates at all levels of higher education in China has approximately quadrupled in the last six years. Prior to 1999, increases in these areas were much smaller. Much of the increased spending is focused on elite universities, and new academic contracts differ sharply from earlier ones with no tenure and annual publication quotas often used. All of these changes have already had large impacts on China's higher educational system and are beginning to be felt by the global educational structure.

Related Publications and Working Papers:

Yao Li, John Whalley, Shunming Zhang, and Xiliang Zhao, "The Higher Educational Transformation of China and Its Global Implications," NBER Working Paper 13849, March 2008.

Press References:

"Documenting China's Higher Ed Explosion," Doug Lederman, Inside Higher Ed, November 8, 2010.

10. Why Are Urban Household Savings Rates in China So High? The Role of Housing and Education

Many studies have noted the unusually high savings rates of urban Chinese households. Also unusual is the pattern of savings over the lifecycle. In most countries the age-savings profile is hump-shaped, that is, savings rates are low for recently formed, younger households, then rise as households go through middle age, and finally decline again for older households with retired members. In urban China, the age-savings profile is U-shaped, higher for young and old households, and lowest for middle-aged households. In recent work with Mattheiu Bussière, Yannick Kalantzis, and Romain Lafarguette, Terry Sicular analyzes the relationship between housing purchases and savings behavior, and carries out an empirical analysis that identifies housing purchases as a factor contributing to high savings rates for young urban households. They also find that the costs of education may be a reason why savings rates decline for middle-aged households. These findings raise questions about whether educational investments should be counted as household savings rather than as consumption, and they point to a significant relationship between the costs of education, savings behavior, and macroeconomic outcomes.

Related Working Papers:

Mattheiu Bussière, Yannick Kalantzis, Romain Lafarguette, and Terry Sicular, "Understanding Household Savings in China: the Role of the Housing Market and Borrowing Constraints," The University of Western Ontario and Banque de France, March 2013.