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Economics Letters 51 (1996) 355-362

economics

letters

Economic growth and human capital accumulation:

Simultaneity and expanded convergence tests

Stephan J. Goetz*, Dayuan Hu

Department of Agricultural Economics, University of Kentucky, Lexington, KY 40546-0276, USA

Received 13 November 1995; acceptedJanuary 1996

Abstract

Earlier economic growth studies are extended to account for simultaneity between economic growth and human capital accumulation. The speed of income convergence and contribution of human capital to economic growth are underestimated if contemporaneous human capital growth effects are ignored.

Keywords: Economic growth; Human capital; Convergence

JEL classification: 040

I.

Introduction

Considerable effort has recently been devoted to the empirical testing of hypotheses generated from long-run economic growth models. Much of this effort was motivated by the early contributions of Solow (1956) and subsequent developments by Barro (1991) and Mankiw et al. (1992). A central theme in this work is that incomes converge over time, and widespread evidence exists that per capita incomes have converged, conditional on human capital stocks, across states and countries in past decades. •In this paper, previous research is extended in two directions. First, the simultaneous relationship between economic growth and growth in educational attainment is examined empirically. Regions with higher stocks of human capital experience faster income growth rates, but faster income growth also leads to higher rates of investment in human capital, ceteris paribus. Second, we investigate growth in educational attainment. Given an upper bound on human capital investment in a community, empirical convergence is expected. This type of convergence - parallel to that of incomes - has largely been ignored in the literature. Yet, it is intimately related to income convergence. This paper, therefore, synthesizes two

*Corresponding author: Tel. (606) 257-8842; fax: (606) 257-7290; e-mail: aecgoetz@ukcc.uky.edu.

0165-1765/96/$12.00 © 1996 Elsevier Science S.A. All rights reserved

PII

S0165-1765 (96)00827-0

356

S.J.

Goetz, D. Hu

/

Economics Letters 51 (1996) 355-362

economic growth and the demand for

education. We use data from southern US counties for the period 1980-1990.

By using data from a

single country, data comparability and quality problems discussed by Summers and Heston (1991) are reduced. The US South is also of interest because residents of this region have historically invested less in education than their counterparts elsewhere in the nation.

topics that have, to date, been analyzed separately:

2.

Specification of the economic growth equation

Since a consensus theoretical framework for specifying regional economic growth models does not exist, variable selection is essentially an empirical issue, conditioned by the units chosen for the analysis. In this study, specification of a functional form and selection of explanatory variables are guided by previous studies. A general economic growth model can be written as (Barro and Sala-I-Martin, 1995, p. 421):

Dy t = F(Y,_I, H,_I, S),

(1)

where Dy t is per capita income growth, Yt-~ initial per capita income (or output), H t_ 1 initial human capital stock, and S a set of control and environmental influences. In most previous studies, functional form F is assumed to be linear (Levine and Renelt, 1992). On the basis of

Barro

empirically as

1992) and Lee and Lee (1995), determinants of income growth are specified

(1991,

(2)

where Y, and Y~_~ are personal income per capita in 1990 and 1980, Dy, = (Y~ - Y,_~)IYt_~, ~"= 10, ~ and F are parameters to be estimated, and u is a random disturbance. We use educational attainment as a proxy for human capital stocks: H,_~ is measured as the percentage of the population 25 years or older in 1980 with a high school or higher degree. Since growth in human capital has been identified as one of the most important contributors to economic growth (Denison, 1984), Dh, = (1-1,- H,_~)/Ht_ ~ is included as a regressor. This permits an evaluation of the independent effects of initial human capital stocks and growth in human capital on income growth. The choice of regressors in S varies in the literature within the context of the study and data limitations. On the basis of previous studies, the following regressors are included here. URBAN (metropolitan counties) and RURAL (counties containing no places with more than 2500 residents) capture the effect of urbanization in a county, with non-urban/non-rural counties (having places with more than 2500 residents but not qualifying as a metro area) serving as the excluded category. HIWA Y is an indicator variable with value 1 if a county has an access ramp to an interstate highway, to measure availability of infrastructure for carrying out economic activity over space, and public spending on highways (HIWYEXP) is used as a proxy for local public investment activity. Availability of land per capita (LANDPCAP) provides a measure of the scope for industrial expansion as one source of economic growth (Plaut and Pluta, 1983). Higher corporate income taxes (CORPTAX), measured by a tax

Dy,

= ~o + ~

Yt

,

+ °t2Ht-,

+ a3Dh,

+ FS,_,

+ u,

,

S.J. Goetz, D. Hu / Economics Letters 51 (1996) 355-362

357

capacity index at the state level, are expected to deter industries from locating in counties and, therefore, stifle economic growth. Unionization rates (UNION) and an indicator variable for right-to-work laws (RTW), both measured at the state level, are also included. Previous studies have found that unions depress economic activity and thus income growth, while the opposite is true for right-to-work laws (Newman, 1983).

3. Specification of the educational attainment equation

Growth in human capital has been modeled as a function of output and initial human capital stocks (e.g. Mankiw et al., 1992, and Jones, 1995). Using a similar functional form as in (2), growth in educational attainment is estimated on the basis of:

(3)

where T is a set of control and environmental variables, /3 and 0 are parameters to be estimated, and v is a random disturbance. To select variables in T, we again draw on recent studies, most of which are based on surveys of individuals. Using National Longitudinal Survey of Youth data, for example, Cameron and Heckman (1993) found that gender, sibling numbers, parents' education, family income and living region influence the probability of entering college. Hauser (1993) confirms Cameron and Heckman's finding that age, household head's occupation and house ownership affect college-entry decisions, based on Current Population Survey data. More recently, using Panel Study of Income Dynamics data, Cohn and Hughes (1994) determined that in addition to variables found to be important by Cameron and Heckman, unemployment rates, average wage rates, and city size also influence college completion. Clearly, at the (aggregated) level of counties, the effects of variables such as gender will be difficult to detect. We therefore limit our choice of regressors to: URBAN and RURAL, to capture city size effects; the unemployment rate (UNEMPLOY), with an expected negative sign according to Cohn and Hughes; the rate of home ownership (HOMEOWNR); family size (FAMSIZE); the level of local taxes per capita (TAXES), for which we expect a negative sign, according to Nerlove et al. (1993); educational expenditures (EDUEXP); and the share of the work force that is employed as professionals (PERCPROF). The latter variable captures 'neighborhood effects' (Katz, 1992), in that children living in communities with higher shares of professionals are more likely to perceive net returns associated with education to be positive, and therefore invest more heavily in schooling. Two indicator variables, South Atlantic (DSA) and East South Central' (DESC) are included in both equations to capture regional effects.

Dh, = flo +/31Yt-.r +/32Ht-~- +/33Dyt+ OT + v,,

4. Effects of initial levels: Simultaneous and reduced-form estimation

The equation system (2) and (3) can be rewritten as

• G =AI+R,

(4)

358

where

and

,t,

=

[

_

1

/3

S.J.

--1]

3

,

Goetz, D. Hu

/

Economics Letters 51 (1996) 355-362

G

=

~Oyt]

LOh,

j

'

A

=

[°gl°gl]

/3

/3

'

I

=

~gt-7]

J H,

_

J

'

[/30 + OT +

"

The reduced form of the system is

G = @-IAI+

q~-lR ,

(5)

and the reduced-form effects of initial levels of income and educational attainment are

cI)-'aI-

1 -

~3/33

/31 -~- 0gl/33

/32 -~- a2/33J [_H,-T[ "

(6)

These parameters capture two effects of each variable. For illustrative purposes, we consider the effects of initial income on income growth. One is the direct effect of Y,_~ on Dy,, represented by a~, which indicates the speed of income convergence. Another effect is that of Y,_~ through Dh, on Dy,, represented by a3/31, which captures the contribution of educational growth to income growth and the effect of initial income on educational growth. To the extent that ~1 <0 and ~3/3~ >0, these two effects are in opposite directions and the conventional reduced-form estimation yields only a net effect. Effects of Y,_~ on Dh t, ~_~ on Dh,, and H,_~ on Dy, can be analyzed in a similar manner.

5.

Empirical results

Two-stage least squares (2SLS) estimates using data from all 1365 counties in the US South are reported in Table 1, along with descriptive statistics for the variables. In the income growth equation, counties spending more on highways experienced significantly faster income growth, as did those with more land resources per capita and those located in states with RTW laws, ceteris paribus. In addition, income growth in South Atlantic and East South Central counties was generally faster than in the base region (West South Central counties). In the educational growth equation, both urban and rural counties experienced faster human capital accumulation, as did counties with more widespread home ownership, smaller families, lower local taxes per capita and a larger share of the workforce in professional occupations. Each of the statistically significant variables in both 2SLS equations had the expected signs. Our main findings are as follows. First, as hypothesized, coefficient estimates a 3 and/33 are

both statistically significant and positive, confirming that a simultaneous relationship exists

between income

with higher stocks of human capital exhibit slower growth in educational attainment. Fig. 1 illustrates this convergence pattern for educational attainment at the state level. Third, and perhaps most importantly, a simultaneous, as opposed to single equation, analysis captures the

and educational growth over time. Second, /32 <0, indicating that regions

S.J. Goetz, D. Hu / Economics Letters 51 (1996) 355-362

Table 1 Regression results for determinants

of income [Dy,] and educational attainment

[Dh,] growth

359

 

2SLS

OLS

 

Summary

statistics

Variable

 

Dy t

Dh t

Dy ~

Dh ,

Mean

Std. dev.

Constant

0.158

0.486"**

0.888"**

0.745***

 

(0.48)

(4.31)

(11.5)

117.5)

 

~

-0.0694***

0.0237***

-0.0538***

0,0133"**

7.403

1.642

 

(7.74)

15.13)

(9.41)

(6,88)

/4,

~

1.495"**

-0.997***

0.398***

-0.977***

0.501

0.101

 

(3.05)

(34.3)

(4.40)

(35.5)

URBAN(O,I)

 

-0.0164

0.0257***

0.00794

0.0296***

0.221

0.415

 

(0.78)

(4.58)

(0.44)

(5.60)

RURAL

(0,1)

 

0.00861

0.0174"**

0.0447***

0.0246***

0.234

0.423

 

(0.38)

(3.21)

(2.83)

(5.43)

DSA(O,1)

 

0.0981"*

0.0266***

0.163"**

0.0474***

0.400

0.490

 

(2.49)

(2.82)

(5.99)

(10.99)

DESC (0,1)

 

0.0747"**

-0.0367"**

0.0693"**

-0.0233***

0.262

0.440

 

(2.78)

(4.83)

(2.61)

(4.40)

HIWAY(O,1)

 

-0.0157

-0.00644

0.408

{).492

 

(1.08)

(0.47)

HIWYEXP ($'000 per capita)

0.660***

0.544**

0.037

0.333

(2.88)

(2.46)

LA NDPCA P (acres per capita)

0.121 ***

0.0574"

0.058

0.249

(2.96)

11.93)

CORTPTAX

(index)

0.0159

0.0299

0.968

0.534

 

0.60

(1.17)

UNION (proportion)

0.0249

-0.212

0.159

0.056

0.12

(1.17)

RTW(O,1)

 

0.129"**

0.130"**

0.773

0.419

 

(5.47)

(5.57)

UNEMPL 0 Y (proportion)

 

O.133

-0.216"**

0.066

0.029

 

(0.82)

(2.66)

HOMEOWNR (proportion)

 

0.0646*

0.00129

0.736

0.074

 

(1.73)

(0.05)

FAMSIZE (persons)

 

-0.0218"*

-0.0330***

2.857

0.221

 

(2.07)

13.51)

TAXES ($'(~) per capita)

 

-0.103 ***

-0.0578***

O. 154

0.163

 

(3.94)

(3.12)

EDUEXP ($'000 per capita)

 

0.0413

-0.0634**

0.266

0.104

 

11.53)

(2.52)

PERCPROF (proportion)

 

0,495"**

0.455***

I).033

0.013

 

(3.15)

(2.96)

360

S.J.

Goetz, D. Hu

/

Economics Letters 51 (1996) 355-362

 

Table

1 (Continued)

 

2SLS

OLS

 

Summary

 

statistics

Variable

Dy,

Dh,

Dy,

Dh,

Mean

Std. dev.

Dh~

1.178'*

0.261

0.107

(2.28)

Dy,

O. 116"*

 

0.9/t0

 

I).250

(2.49)

Adjusted R 2

0.202

0.633

(I.202

(I.6411

Condition index

6.t/57

4.638

5.748

4.366

Notes: Absolute value of t-statistics are in parentheses. Sample size = 1,363. Significance levels:

* = 10%,

** = 5%,

*** =

1%

or lower.

dual effects of initial income levels on economic growth: the direct effect of initial income levels (c~1 -- -0.0694) and the indirect educational growth effect (a3/31 = 0.0279). The reduced-form coefficient on initial income in the income growth equation [(ce1 + %/31)/

convergence

(1-

%/33) ]

is

estimated

to

be

-0.0480

in

this

system.

Compared

with

the

coefficient (c~1) estimated in the structural form, the reduced form underestimates the speed of convergence. As in most previous studies, income convergence is still observed here in the reduced-form estimation because the direct initial income effect dominates the indirect effect

([oeli >%/31). Since most previous studies on income convergence have used reduced-form regressions, we include OLS estimates of Eqs. (2) and (3) in Table 1 for comparative

purposes,

value of which is again smaller than a 1. In a similar manner, two effects of the initial level of educational attainment on income

with

a 3 =/33

= 0.

The

estimated

OLS coefficient for Y,_~ is -0.0538, the absolute

Rate of growth in human capital, 1980-90

0.30

0.25

-

6Co

NC

o

oGA

0.20

0.15

0.10

0.50

o oAL°LA

MSo

i

0.55

~TV

i

0.60

i

0.65

FL

0.70

Initial stock of human capital, 1980

Fig.

I.

State-level

convergence

in

human

capital,

US

South,

1980-1990.

s.J.

Goetz, D. Hu

/ Economics Letters 51 (1996) 355-362

361

(Or 2 = 1.495), and the negative indirect effect

(a3fl2 = -1.174). In the reduced-form equation, the net effect of this variable is (a 2 + a3/32)/ (1 - a3f13) = 0.372, which is considerably smaller than a 2 because the effect of convergence in educational attainment is included. The implication of this finding is that reduced-form

growth can be identified: the positive direct effect

regressions may yield a negative estimate of o~2 if the influence of educational convergence dominates.

6.

Conclusion

We examine the conditional convergence observed by Barro (1991) and Mankiw et al. (1992) from a different perspective. In most previous studies, the coefficient of initial income was estimated using single equation, reduced-form models. It is possible for the indirect effect of income growth (through human capital growth) to offset the direct effect. In this case, we would observe income divergence over time. Furthermore, the contributions to income growth of initial levels of income and human capital are underestimated (in absolute value terms) if contemporaneous human capital growth effects are not controlled for.

Acknowledgements

Research

underlying this manuscript was

Competitive Grants Program of USDA/ERS

funded under

(grant no.

National

93-37401-9376).

the

Research

Initiative,

References

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