Economic Development, Growth of Human Capital, and the Dynamics of the Wage Structure
Human capital is not only a factor in economic growth, but also an effect of it or of developments generated by economic growth. In this paper I elucidate the sources of growth of human capital in the course of economic development. On the supply side discussed in Part I I include the growth of family income, urbanization, the demographic transition triggered by declines in mortality, and the rising cost of time, an important factor in the growth of the female labor force in the 20th century. 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. The trendless (though fluctuating) rates of return on human capital are consistent with growing demands for human capital in the labor market. Growth of demand for labor skills in a function of capital accumulation and of technological changes which put a premium on labor skills. Evidence on this hypothesis is summarized in Part II, and on supply responses to growing demand for human capital in Part III. 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 sizable sectors of society.
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