The Human Capital Constraint : Of Increasing Returns, Education Choice and Coordination Failure

This paper explores the idea that LDCs may face a human capital constraint in terms of having insufficient numbers of suitably educated people to be able to take advantage of technological innovations in the rich world. Technologically advanced sectors which operate under increasing returns to scale and hire educated people as inputs may require a certain minimum pool of educated people in order to commence production. In such a situation, with education choices being endogenous, coordination failure can arise in the choice of education. This is because one person's choice depends on whether sufficient other people are choosing education to allow the advanced sector to commence production. The paper sets out a simple two-sector model in which uneducated people work in a diminishing returns to scale sector while educated people can potentially work in the advanced sector, and explores the conditions under which coordination failure can occur. This done, the paper makes the point that human capital is not homogenous; different levels of education are likely to be required in different industries. A three-sector model is constructed in which uneducated people, people with basic education, and people with higher education are hired by three different industries. This richer model allows us to analyze the links between the choice of basic and higher education, and examine how subsidies targeted at these different types of education are likely to differ in their impact on schooling and productivity. In particular, it is found that subsidies to basic education are likely to be more efficacious than subsidies to higher education under most circumstances