Economic growth and economic development 513

Introduction to Modern Economic Growth capital-skill complementarities in imperfect labor markets can lead to pecuniary externalities Nevertheless, existing evidence suggests that the extent of human capital externalities is rather limited–with the important caveat that there might be global externalities that remain unmeasured A particular channel through which global externalities may arise is R&D and technological progress, which are the topics of the next part of the book An alternative source of mismeasurement of the contribution of human capital is differences in human capital quality There are significant differences in school and teacher quality even within a narrow geographical area, so we may expect much larger differences across countries In addition, most available empirical approaches measure human capital differences across countries by using differences in formal schooling However, the Ben Porath model, analyzed in Section 10.3, suggests that human capital continues to be accumulated even after individuals complete their formal schooling When human capital is highly rewarded, we expect both higher levels of formal schooling and greater levels of on-the-job investments Consequently, the Ben Porath model suggests that there might be higher quality of human capital (or greater amount of unmeasured human capital) in economies where the levels of formal schooling are higher If this is the case, the empirical measurements reported in Chapter may understate the contribution of human capital to productivity Whether or not this is so is an interesting area for future research The third set of novel issues raised by the modeling of human capital is the possibility of an imbalance between physical and human capital Empirical evidence suggests that physical and human capital are complementary This implies that productivity will be high when the correct balance is achieved between physical and human capital Could equilibrium incentives lead to an imbalance, whereby too much or too little physical capital is accumulated relative to human capital? We saw that such imbalances are unlikely or rather short lived in models with competitive labor markets However, our analysis in Section 10.6 shows that they become a distinct possibility when factor prices not necessarily reflect marginal products, as in labor markets with frictions The presence of such imbalances might increase the impact of human capital on aggregate productivity 499