1、LESSON 5Human Capital is investment in people just as physical capital is investment in machinery, tools, equipment, etc.Human Capital is just as important as physical capital and in terms of regional development, it matters a great deal.Human capital theory looks at labour as a differentiated input

2、 or factor of production.It sees the possibility of improving the quality of labour through education, on-the-job training, improved health, better nutrition, etc.Money spent on any of these activities in order to improve the quality of labour should be treated as investment, just as we call spendin

3、g on new machines physical capital investment.Endogenous growth theory and a lot of other evidence like the experience of the high-performance Asian economies all confirm the importance of a well-trained population and labour force.As with the other factors we have been examining, human capital inve

4、stment is not a guarantee of regional development but it is important as one component of developmentEducation is most often used as a proxy for human capital investment.But it is important to recognize that education in terms of the formal school system may be a very imperfect measure of human capi

5、tal investment.This being said, if we calculate the rate of return of various levels of education we find high rates of return for all levels of education, with primary education being the highest, secondary education next and higher education third.The way these rates of return are calculated is by

6、 looking at the difference in income over an individuals working life caused by education.So, for example, if we calculate the average earnings of a group of people with no formal education and one with primary education, then we can say that the difference in average earnings is due to the educatio

7、n the second group has received. This represents the benefits of education and if we also know the cost of this education, we can calculate the rate of return.The rate of return is revenue/cost x 100% when all revenue and cost items are expressed in current dollars.Generally speaking, studies of the

8、 rate of return to education done in this way show all levels of education with private rates of return higher than the opportunity cost of capital.This means that spending money on education yields a higher rate of return than most alternative uses of the money.Many of these studies argue that the

9、social rate of return to education is lower than the private rate of return because they assume the benefits are the same but that the costs are lower for individuals because governments subsidize education.Under these assumptions, we get Social rate of return = increase in lifetime earnings/total c

10、ost of educationPrivate rate of return = increase in lifetime earnings/private share of total costWhere private sharetotal costIf this is correct, then it means that students (or their parents) should pay more of the costs of education. As long as students can earn a rate of return from education gr

11、eater than the opportunity cost of capital, then they will still buy education and should pay the full cost.These studies also argue that more money should be spent on primary education than on secondary education and more on secondary education than on higher education because this reflects relativ

12、e rates of return.It is certainly true that there are many examples of high returns to primary education. A World Bank study, for example, shows the proportion of growth in high performance Asian economies predicted by enrolments in primary education. These numbers are all above 50% and some are abo

13、ve 85%.We also have to remember that education is a cumulative process. You have to have primary education before you can go on to secondary education and you need to complete secondary school before you can go on to tertiary education. So the process must start with primary education.But this still

14、 leaves open the question of who pays.To answer this, we have to introduce the concept of externalities and imperfect markets.Externalities are benefits or costs received by or imposed on parties other than the direct participants in an economic transaction.In the case of education, we can argue tha

15、t there are significant positive externalities, i.e., significant external benefits, from more education.These externalities include things like new knowledge creation, more efficient workers, more worker cooperation producing productivity gains, etc.This means that it could be justified for governm

16、ent to pay for some parts of education because private persons may buy too little and these externalities will then be less than they should be.But we still need to know whether the private return is greater than the opportunity cost of capital and whether the right amount of education will be bough

17、t by private individuals.We can show that some subsidies may be required even under relatively perfect market conditions to get the optimal amount of education.But we also have to take into account that markets are not perfect.Education can be regarded as a merit good where a merit good is one that

18、society will underconsume or underinvest in due toignoranceuncertainty orirrationality In this case, more subsidies may be required to achieve the optimal amount of education.The three readings for this section of the course all deal with the case of China.One of these papers looks at human resource

19、 investment specifically after first observing that regional inequality in China has soared in the last 20 years.The gap between the coastal region and other regions has increased significantly since 1991. By 2003, the ratio of real per-capita GDP between the wealthiest province and the poorest was

20、8.65. The northeast region which was the leading region in real per-capita GDP in 1978, by 2003 was 30% behind the coastal region. The coasts advantage over the interior region and the far west was 2.4 in terms of the real per-capita GDP ratio.The authors find that the returns to education above the

21、 elementary level by region areDirectIndirectCoastal0.1230.280Northeast0.0840.277Far West0.1850.232Interior0.1860.282National0.1440.261These are very significant numbers.The authors argue that human capital affects output in three ways:Educated labour directly contributes to productionThe proportion

22、 of workers with senior high school or above directly affects TFP growth via its effect on innovation.There is an indirect spillover effect of human capital on TFP growth.The overall conclusion of the paper is that human capital investment in less-developed areas can enhance economic efficiency and

23、reduce inequality.They argue that the Grand Western Development Project which involves enhancing infrastructure in 11 western provinces should be doubled to provide equal funding to human capital investment and that this will do more to reduce inequality than infrastructure alone.The second paper lo

24、oks at innovation activities in different provinces in China and tests whether education differences are able to explain differences in innovation.Endogenous growth theory says that human capital is one of the factors that drives growth and that it does so through innovation activities. Thus regions

25、 that are richer typically have higher levels of educational attainment and are able to use this to further innovation activity and grow even faster as a result.Based on the statistical analysis in this paper, the main conclusions are:Innovation activities significantly increased across China from 1

26、997-2006.The spatial spillovers of innovation activities also rose a neighboring province effect.The % of college-educated workers is a significant predictor of regional innovation intensity.Over time the impact of education on innovation has decreased.The third paper in this section looks at some f

27、urther aspects of human capital in a regional context.The paper by Fu and Gabriel is concerned with internal labour migration in China and how this has affected regional disparities. More specifically, they examine whether the concentration of skilled labour in major urban centers creates spillover

28、benefits for skilled labour that cause skilled labour to become even more concentrated in regions which are already employing more skilled labour and in the process make regional disparities worse. But they also look at how this impacts on low-skill workers.The study finds that the motivation for mi

29、gration differs between low-skill and high-skill workers. The former are influenced by the amenities at their destination as well as human capital concentration and other aspects of human capital agglomeration. Unskilled workers, by contrast, are not influenced by these things, nor is there much interaction between low and high skill workers.More interaction between the two groups would benefit the unskilled workers and lead to them acquiring more skills and moving up in the labour market. But they do not because they do not permanently relocate and acquire no interest