Human Capital, Innovation and Technology Diffusion

This paper develops a new latent index of human capital identified as valuable skills for seventy countries for the period 1970-2003. The index is compared to existing measures of human capital in assessing the Benhabib and Spiegel (2005) model of logistic technology diffusion. The study undertakes extensive sensitivity analysis and accounts for alternative production functions, capital-skill complementarity (CSC), skill-unskilled labour complementarity (CNC), and skill-biased-technical-change (SBTC). The evidence shows that (i) the new index outperforms existing indicators; (ii) the index also facilitates innovation and technology diffusion, and is consistent with the theoretical model; (iii) the valuable skills-education gap has widened in Africa and advanced OECD countries, and (iv) the CSC, SNC and SBTC hypotheses are confirmed but the effects are nonlinear