Specifying Human Capital: A Review, Some Extensions, and Development Effects

A review of the measures of the stock of human capital used in empirical growth research reveals that human capital is mostly poorly proxied. The simple use of the most common proxy, average years of schooling of the working-age population, misspecifies the relationship between education and the stock of human capital. Based on human capital theory, the specification of human capital should be extended to allow for decreasing returns to education and for differences in the quality of a year of education. Cross-country differences in quality-adjusted human capital can account for about half the world-wide dispersion of levels of economic development and for virtually all the development differences across OECD countries.