Economic development, growth of human capital, and the dynamics of the wage structure

Abstract

In this paper I elucidate the sources of growth of human capital in the course of economic development. On the supply side (Section 1) I include the growth of family income, urbanization, the demographic transition, and the rising cost of time.The supply side alone cannot explain the continuous growth of human capital as it implies a self limiting decline in rates of return below those in alternative investments. Such declines are offset by growing demands for human capital in the labor market. Growth of demand for labor skills is a function of capital accumulation and of technological changes. Evidence on this hypothesis is summarized in Section 2 and on supply responses to growing demand for human capital in Section 3. Changes in the skill and wage structures in the labor market are an important part of the evidence.The reciprocal relation between economic growth and the growth of human capital is likely to be an important key to sustained economic growth. A caveat applies to indirect effects of economic growth on family instability, which may lead to a deterioration of childhood human capital in some sectors of society.