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Human Capital Notes

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Human Capital Revision

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Lecture 1: Human Capital Human capital is used to describe education, health and other human capacities that can raise productivity when increased. Health and education are basic objectives of development. Health increases productivity and successful education relies on good health. They are objectives of development (outputs) and components of development (inputs) to the aggregate production function. Trends?

• 1950, 280 out of 1000 children in the developing world died before their 5th birthday.

• 2005, this was reduced to 114 per 1000 in low-income countries.

• ⅔ of the world's illiterate are women.

• There were 780 million illiterate people aged 15 or above in 2004.

World Value Survey, 2008

Health and education are investments made in the same individual. Greater health capital may raise the return on investment in education for several reasons.
- Health is important for school attendance; healthier children are more successful in school and learn more efficiently. Healthier individuals are more able to use education at any point in life.
- Deaths of school-age children increase the cost of education per worker and longer life spans raise the return to investment in education. Greater education capital may raise the return to investment in health because many health programs rely on skills learned in school, school also teaches personal hygiene and sanitation. Higher human capital leads to higher income, improvements in productivity and cognitive skills. Healthier individuals earn more and are less likely to be unemployed according to Strauss and Thomas, 1998. INCOME ELASATICITY OF HUMAN CAPITAL EXPENDITURES There is a positive relationship between income and human capital. Income elasticity of human capital expenditures is the % increase in human capital associated with a 1% increase in income.
ε H C , I =

∆ HC
∆I

Nutrition for example is key to physical and cognitive development. A 1% increase in income is associated with a 0.3-0.5% increase in calories (elasticity less than 1). INCOME SHOCKS AND HUMAN CAPITAL INVESTMENT - Duflo (2003); 1991 pension reform in South Africa Men were eligible if over 65 and poor, women were if over 60 and poor. Pension is a positive income shock for the household. The impact on children's health and nutrition was measured e.g. weight-for-height which is a short-term indicator of nutrition, responds to changes rapidly as well as height-for-age which is a long term indicator of health, reflects accumulated health over time. The main effect of pension varies depending on who receives it. Positive effect of pension eligibility on children living with eligible women, no effect if men are eligible. Method Data from 1993 World Bank survey - children's anthropometric measures taken from 9000 households and compared to children living in households with and without an eligible member. Short-term indicator of health in the sense that looks at the difference between eligible and ineligible households. Long-term indicator as shows the difference between children in eligible and ineligible households depending on

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