Economics: Productivity and Human Capital

story of gamal abouali

"Gamal's family, who lived in Kuwait, were insistent that their son finish his degree in three years instead of four. this required taking extra classes each quarter and attending school every summer, all of which seemed rather extreme to me at the time. I had lunch with Gamal's father once, and he explained that the Palestinian existence was itinerant and precarious. Mr. Abouali was an accountant, a profession that he could practice nearly anywhere in the world - because, he explained, that is where he might end up. Gamal was studying engineering, a similarly universal skill. The sooner he had his degree, his father insisted, the more secure he would be. Not only would the degree allow him to earn a living, but it might also enable him to find a home. In some developed countries, the right to immigrate is based on skills and education - human capital. Mr. Abouali's thoughts were strikingly prescient. After Saddam Hussein's retreat from Kuwait in 1990, most of the Palestinian population, including Gamal's family, was expelled because the Kuwaiti government felt that the Palestinians had been sympathetic to the Iraqi aggressors

value of NAFTA to U.S.

"When Ross Perot ran for president in 1992 as an independent, one of his defining positions was opposition to the North American Free Trade Agreement (NAFTA). Perot reasoned that if we opened our borders to free trade with Mexico, then millions of jobs would flee south of the border. Why wouldn't a firm relocate to Mexico when the average Mexican factory worker earns a fraction of the wages paid to American workers? The answer is productivity. While Ross Perot was warning that most of the U.S. economy would migrate to Guadalajara, mainstream economists predicted that NAFTA would have a modest but positive effect on American employment. Some jobs would be lost to Mexican competition; more jobs would be created as exports to Mexico increased. We are now more than a decade into NAFTA, and that is exactly what happened. Economists reckon that the effect on overall employment was positive, albeit very small relative to the size of the U.S. economy

importance of annual productivity growth

"Will our children be better off than we are? Yes, if they are more productive than we are, which has been the pattern throughout American history. Productivity growth is what improves our standard of living. If productivity grows at 2% a year, then we will become 2% richer every year. Why? Because we can take the same inputs and make 2% more stuff. Productivity growth makes us richer, regardless of what is going on in the rest of the world. If productivity grows at 4% in Japan and 2% in the US, then both countries are getting richer.

the city of Harvard degrees and one garbage collector

"Yet if the sludge is not collected, then the whole economy will grind to a halt. If everyone has a Harvard degree, who hauls away the sludge? The sludge hauler does. And he or she, incidentally, would be one of the best-paid workers in town. If the economy depends on hauling this stuff away, and no machine can do the task, then the community would have to induce someone to do the work. The way to induce people to do anything is to pay them a lot. The wage for hauling sludge would get bid up to the point that some individual-a doctor, or an engineer, or a writer-would be willing to leave a more pleasant job to haul sludge. Thus, a world rich in human capital may still have unpleasant tasks-proctologist spring to mind-but no one has to be poor. Conversely, many people may accept less money to do particularly enjoyable work-teaching college students comes to mind"

irrelevance of one country growing faster than another, as long as both are growing

Productivity growth makes us richer, regardless of what is going on in the rest of the world. If productivity grows at 4% in Japan and 2% in the US, then both countries are getting richer. - page 138 What would be the effect of America if 500 million people in India became more productive and gradually moved from poverty to the middle class? We would become richer, too. Our legal regulatory, and tax structures also affect productivity

why malthus was wrong

as Gary Becker points out, "parents did spend more on children when their income rose-as Malthus predicted-but they spent a lot more on each child and had fewer children, as human capital theory predicts. As the advantages of having more children declined, people began investing their rising incomes in the quality of their children, not merely the quantity

types of unemployment

frictional, structural, cyclical

things that have a negative impact on productivity

high taxes, bad government, poorly defined property rights, or excessive regulation can diminish or eliminate the incentive to make productive investments. collective farms, for example, are a very bad way to organize agriculture. Social factors, such as discrimination, can profoundly affect productivity. A society that does not educate its women or that denies opportunities to members of a particular race or caste or tribe is leaving a vast resource fallow.

the key to a successful country in this age

human capital creates opportunities. it makes us richer and healthier; it makes us more complete human beings; it enables us to live better while working less. most important from a public policy perspective, human capital separates the haves from the have-nots "the demand everywhere will be for ever higher levels of human capital. the countries that get that right, the companies that understand how to mobilize and apply that human capital, and the schools that produce it... will be the big winners of our age. for the rest, more backwardness and more misery for their own citizens and more problems for the rest of us"

how international trade contributes to U.S. income inequality

international trade puts low-skilled workers in greater competition with other low-skilled workers around the globe. In the long run, international trade is a powerful force for good; in the short run, it has victims.

unemployment insurance

is a government program that reduces the hardship of joblessness by guaranteeing that unemployed workers receive a percentage of their farmer income while unemployed

unemployment rate (u)

is the percentage of the labor force that is unemployed

human capital definition

is the sum total of skills embodied within an individual: education, intelligence, charisma, creativity, work experience, entrepreneurial vigor, even the ability to throw a baseball fast economic value of human assets

structural unemployment

is unemployment caused by changes in the industrial makeup (structure) of the economy although structural unemployment can cause transitional problems, it is often a sign of a healthy, growing economy

frictional unemployment

is unemployment caused by delays in matching available jobs and workers. is another type of natural unemployment: no matter how healthy the economy may be, there is always some frictional unemployment occurs even in the healthiest economy. Because we live in a world of imperfect information, there are incentives for employees to keep searching for the perfect job or for employers to search longer for the best employees even though frictional unemployment is natural, its level can rise or fall over time

cyclical unemployment

is unemployment caused by economic downturns this type of unemployment generates the greatest concern among economists and policymakers. it is the most serious type of unemployment because it means that jobs are not available for many people who want to work. and are consistent with a growing, evolving economy, the root cause of cyclical unemployment is an unhealthy economy. unlike structural unemployment and frictional unemployment, cyclical unemployment is not considered a natural type of unemployment. the duration of cyclical unemployment is open-ended

unemployment

occurs when a worker who is not currently employed is searching for a job without success

creative destruction

occurs when the introduction of new products and technologies leads to the end of other industries and jobs, as some jobs become obsolete. this process leads to structural unemployment.

figure 7.2

pg. 211 the evolution of jobs in the US: over the past two centuries, jobs in the US have evolved from being primarily agricultural to industrial (manufacturing) and then to service

importance of investing in human capital

the underlying problem is a lack of skills, or human capital. The poverty rate of high school dropouts in America is 12 times the poverty rate for college graduates. Why is India one of the poorest countries in the world? Primarily because 35% of the population is illiterate. human capital is about much more than earning more money. It makes us better parents, more informed voters, more appreciative of art and culture, more able to enjoy the fruits of life. Educated parents are more likely to put their children in car seats and teach them about colors and letters before they begin school. In the developing world, the impact of human capital can be even more profound. Similarly, out total stock of human capital - everything we know as a people - defines how well off we are as a society. ??

the virtuous cycle

there is a striking lack of correlation between natural resources and standard of living. *High levels of human capital create a virtuous cycle; well-educated parents invest heavily in the human capital of their children. Low levels of human capital have just the opposite effect. Disadvantaged parents beget disadvantaged children, as any public school teacher will tell you. High savings leads to high investment leads to high incomes leads back to high savings.

indirect incentives (unintended consequences) of government unemployment payments

unemployment insurance also creates unintended consequences. for one thing, receiving the cushion of unemployment benefits makes some people feel less inclined to search for and take a job. these workers spend more time unemployed when they have insurance; without unemployment insurance, they are much more motivated to seek immediate employment.