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Unformatted text preview: American Economic Association How Important Is Human Capital for Development? Evidence from Immigrant Earnings Author(s): Lutz Hendricks Reviewed work(s): Source: The American Economic Review, Vol. 92, No. 1 (Mar., 2002), pp. 198-219 Published by: American Economic Association Stable URL: http://www.jstor.org/stable/3083328 . Accessed: 28/11/2011 08:55 Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at . http://www.jstor.org/page/info/about/policies/terms.jsp JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact [email protected] American Economic Association is collaborating with JSTOR to digitize, preserve and extend access to The American Economic Review. http://www.jstor.org How Important Is Human Capital for Development? Evidence from Immigrant Earnings By LUTZ HENDRICKS* This paper offers new evidence on the sources of cross-country income differences. It exploits the idea that observing immigrant workers from different countries in the same labor market provides an opportunity to estimate their human-capital endow- ments. These estimates suggest that human and physical capital account for only a fraction of cross-country income differences. For countries below 40 percent of U.S. output per worker, less than half of the output gap relative to the United States is attributed to human and physical capital. (JEL 015, 041, F22) Cross-country differences in per capita out- puts are far larger than standard neoclassical growth models predict. In response, some au- thors have proposed to abandon the neoclassical framework in favor of theories where countries differ in their total factor productivities, possi- bly due to technology gaps (e.g., Paul Romer, 1993; Edward C. Prescott, 1998). An alternative approach, pioneered by N. Gregory Mankiw et al. (1992), is to augment the neoclassical model by adding human capital. Since the two ap- proaches differ dramatically in their policy im- plications, it is important to determine the relative contributions of human capital and total factor productivity (TFP) to cross-country in- come differences. Previous attempts at resolving this issue have encountered the problem of measuring coun- tries' human-capital stocks. A common ap- proach is to assume that workers of given age and education have the same human-capital en- dowments in all countries (e.g., Robert E. Hall and Charles I. Jones, 1999). A difficulty with this approach is that possible differences in un- measured skills are not captured. Since mea- sured skills account for only a relatively small fraction of earnings variation within countries, this could be an important omission. An alter- native approach postulates a human-capital pro-...
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