Knowledge, Human Capital, Markets and Economic Growth in Modern Economies

Gary S. BeckerUniversity of Chicago

June 2, 2005

Beijing, China

China Center for Economic Research

An Investment in Knowledge Pays the Best Interest

Investment in Human Capital as percentage of GDPUnited States - 2001

Sources: Own calculations based on World Health Organization and, UNESCO, UIS Global Statistics.

17 – 25+Percent

9 - 11%

4 – 6%

4 – 8%

???

Schooling

On the Job Training

Health

Adult Education

Wage Premiums by Education Level United States1963 - 2001

Source: Murphy, Erin S. “How pervasive are the Gains from Schooling.” St. Norbert College, Working Paper, April 2003.

Change in College/High School Wage Gap for European CountriesCohorts Specific Changes

Born 1940 - 1949 Born 1950 - 1959 Years

80s 90s % Change 80s 90s %Change

Austria 0.55 0.50 -8.4 % 0.32 0.37 15.6% 85, 97

Denmark 0.18 0.27 54.8% 0.14 0.27 95% 85, 95

Finland 0.38 0.44 15.9% 0.36 0.38 3.8% 87, 93

France 0.32 0.33 4.4% 0.35 0.35 1.1% 90, 98

Germany 0.40 0.48 18.9% 0.38 0.41 9.2% 85, 97

Italy 0.19 0.32 66.1% 0.24 0.28 13% 87, 98

Netherlands 0.27 0.18 -33.3% 0.16 0.19 16.4% 86, 96

Portugal 0.18 0.40 123.6% 0.46 0.57 22.6% 85, 93

Switzerland 0.33 0.35 5.4% 0.28 0.32 14.5% 92, 98

UK 0.27 0.28 3% 0.20 0.30 50.2% 85, 95

Source: Brunello, Giorgio, Simona Comi and Claudio Lucifora. The College Wage Gap in 10 European Countries: Evidence from Two Cohorts. IZA Discussion Papers 228, Institute for the Study of Labor (IZA), 2000.

Returns to Education - China1988, 2002

Year Sample Rate of Return to Education

Adjustment for Income Growth in

Future

1988 Urban 3.3% 9.3%

2000 Urban 11.1% 17.1%

Sources: 1988: Johnson, Emily N., and Chow, Gregory C. (1997). 2000: Heckman and Li (2003).

Returns to Education - Japan2000

Year Rate of Return to Education

2000 8%Source: Blondal (2002) .

0

0.05

0.1

0.15

0.2

0.25

1980 1985 1990 1995 2000

English Schooling

Returns to English and Schooling by Year- Men Aged 30-55 - India1980-2000

Adjustment for Income Growth in Future:

10% + 4% = 14%

1980 1985 1990 1995 20000

0.05

0.10

0.15

0.20

0.25

English Schooling

Source: Provided by Mark R. Rosenzweig from his own calculations.

Labor Productivity GrowthUnited States1995 – 2005

Source: Bureau of Labor Statistics.

0

1

2

3

4

5

6

7

8

9

10

1995

1996

1997

1998

1999

2000

2001

2002

2003

- Q1

2003

- Q2

2003

- Q3

2003

- Q4

2004

- Q1

2004

- Q2

2004

- Q3

2004

- Q4

2005

- Q1

%

Total Factor Productivity (TFP) in Non-Agriculture United States 1800 – 1940

TFP non-agricultural sector

Source: Greenwood, J., and Seshadri, A. "The U.S. Demographic Transition". AEA Paper and Proceedings, 2002.

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

2

1800 1810 1820 1830 1840 1850 1860 1870 1880 1890 1900 1910 1920 1930 1940

1800-1840 → 0.79

1840-1900 → 0.73

1900-1929 → 1.63

1929-1940 → 1.78

Age-Earnings profile for MalesUnited States - 2005

6.6

6.8

7

7.2

7.4

7.6

7.8

8

8.2

8.4

16-19 20-24 25-34 35-44 45-54 55-64 65 +

Age

Ln

Mo

nth

ly E

arn

ing

s

Source: Bureau of Labor Statistics.

Age-Earnings profile for MalesJapan - 2002

11.0

11.5

12.0

12.5

13.0

13.5

17 18 - 19 20 - 24 25 - 29 30 - 34 35 - 39 40 - 44 45 - 49 50 - 54 55 - 59 60 - 64 65 age +

Age

Ln

Mo

nth

ly E

arn

ing

s

Source: Statistics and Information Department Minister's Secretariat. Ministry of Health, Labour and Welfare, Japan.

Economic Gains from Reductions in MortalityUnited States – 1970-1998

Aggregate Gains (billions of $1996)

1970-80 1980-90 1990-98 1970-98

Males 21,215 12,139 13,223 46,577

Females 15,863 6,979 3,461 26,303

Total 37,078 19,117 16,685 72,880

Source: Murphy, K.M., and Topel, R. H. The Economic Value of Medical Research. In Measuring the Gains from Medical Research: An Economic Approach, edited by K.M. Murphy and R. H. Topel. Chicago: The University of Chicago Press. 2003.

The Economic Value of Reducing Cancer and Heart Diseases Mortality by 10% for the Total Population in United States

Disease Category

Increase in Value of Life

(Billions of Dollars)

Total Population

Cancer $4,359

Heart Diseases $4,085

Source: Murphy, K.M., and Topel, R. H. 2003. The Economic Value of Medical Research. In Measuring the Gains from Medical Research: An Economic Approach, edited by K. M. Murphy and R.H. Topel, The University of Chicago Press, 2003.

Cross-Country Regression to the Mean in Income per Capita1960-2000

Source: Becker, G. S., Philipson, T., and Soares, R. The Quantity and Quality of Life and the Evolution of World Inequality. American Economic Review, forthcoming.

-1

-0.5

0

0.5

1

1.5

2

2.5

6 7 8 9 10

ln(Income 1960)

ln(I

nc 2

000)

- ln

(Inc

196

0)

weighted regression

y = 2.1 - 0.13 * x

Cross-Country Regression to the Mean in Full-Income1960-2000

-1

-0.5

0

0.5

1

1.5

2

2.5

6 7 8 9 10

ln(Income 1960)

ln(F

ull I

nc 2

000)

- ln

(Inc

1960

)

weighted regression

y = 3.4 - 0.26 * x

Source: Becker, G. S., Philipson, T., and Soares, R. The Quantity and Quality of Life and the Evolution of World Inequality. American Economic Review, forthcoming.

The Heritage Foundation/Wall Street Journal Index of Economic Freedom 2005

Rank - Economic Freedom

(Out of 155 countries)

Country

1 Hong Kong

2 Singapore

3 Luxembourg

4 Estonia

5 Ireland

6 New Zealand

7 United Kingdom

8 Denmark

9 Iceland

10 Australia

39 Japan

112 China

118 India

Basically China ranks low in the following items:

• Trade Policy (but 1 point better than in 2004)

• Fiscal Burden (0.3 points better than in 2004)

• Foreign investment

• Banking and Finance: Four state-owned banks, which have a combined

market share of nearly 70 percent, dominate the banking sector.

• Property Rights: China's judicial system is weak. The Economist Intelligence

Unit reports that "many [foreign firms] prefer arbitration because of concerns

about the speed and impartiality of the courts.

• Regulation

Japan ranks low in the following items:

• Fiscal Burden: In 2003, government expenditures as a share of GDP

decreased 0.4 percentage point to 38.3 percent, compared to a 0.6

percentage point increase in 2002.

• Banking and Finance: Japan’s banking system, although

competitive, suffers from a large number of non-performing loans.

Banks often make loans on criteria other than creditworthiness.

• Regulation: According to the U.S. Department of Commerce, “Japan’s

reputation for protectionism and red tape…is well deserved…. [T]he

Japanese economy remains over-regulated and those regulations can

be used to hinder foreign firms’ attempts to gain access to the market.”

Conclusions

• Human Capital has become increasingly important.

• Showed growth in returns to schooling, health.

• On the job training also important

• Perhaps in midst of technological revolution that will last for decades.

• Human capital investment requires flexible economic system to be most productive: Capital markets, labor and product markets.