Human Capital, Economic Growth

and Total Factor Productivity in the

Agricultural Sector
Leonardo A. Lanzona, Jr.
Professor
Ateneo de Manila University
Objectives of the Paper
To provide an empirical
evaluation of a simple (Solow)
growth model in the case of
Philippine agriculture.
More importantly, to determine
how the model can be improved
by extending the model to
include human capital, that is, by
recognizing that labor in different
sectors may possess different
levels of education and different
skills.
To provide an alternative
Rationale
 Threemain reasons for incorporating human
capital in the study of productivity:
◦ Because human capital is correlated with savings
and population, omission of human capital
accumulation in productivity estimates will result in
biased estimates of the impact of these variables
on growth and total factor productivity
◦ Because of the productivity effects of human
capital (noted in labor studies), for any given rate of
human capital accumulation, higher saving or lower
population growth leads to higher levels of
productivity and income, and thus also human
capital. Failure to consider the human capital will
lead to misleading estimates of technical
productivity.
◦ Because of the varied forms of human capital,
differential effects of human capital should be
included in the study of growth and productivity.
Varied steady states can be achieved under varied
human capital
A Preliminary Model
Based on Mankiw, Roemer and Weil
(1990)
Suppose that output, Y, in an economy
is produced by combining physical
capital, K, with skilled labor, H,
according to a constant
1 returns, Cobb-
YK
Douglas (AH) function
production

where A represents labor-augmenting

technology (or total factor
productivity) that grows exogenously
Preliminary Model (cont.)
Individuals in this economy accumulate
human capital by spending time
learning new skills instead of working.
Let u denote the fraction of an
individual’s time spend learning skills
and let L denote the total amount of
(raw) labor used in the production in
the economy. Unskilled labor learning
skills over time generates skilled labor
H in thefollowing manner:
H e L u

where is a positive constant. If u is

zero, then , showing that all labor is
unskilled.
Preliminary Model (cont.)
 Byincreasing , a unit of unskilled labor
increases the effective units of skilled
labor, H. In order to determine how much,
we estimate
dlogH

du
 This equation states that a small increase
in increases H by the percentage . This
formulation is intended to match the
literature in labor economics that finds
additional years of schooling increases the
wage by something like seven percent.
 In this model, u is assumed constant and
given exogenously in the same way that
the saving rate is also exogenous and
Preliminary Model (cont.)
If we let lower-case letters denote
variables divided by the stock of
unskilled labor, L, and rewrite the
 1
 k of
production function inyterms (Ah )
output
per worker u
h  eas:
where
%

y% of
If we divide both sides k the output
k%
equation byy%Ah, then .
The variables and are sometimes
referred to as "output per effective
unit of labor“ and "capital per
effective unit of labor.“
Preliminary Model (cont.)
This labeling is motivated by the fact
that technological progress is labor-
augmenting. Ah is then the "effective"
amount of labor used in production.
In the Solow Model, the capital

accumulation over time is seen as:
K  skY  dK
wheresk is the investment rate for
physical capital and d is the

constant
depreciation rate k  sy  (n  d)k
Moreover, dividing by labor,
where n is the growth rate of the
labor force, the capital accumulation in
per worker terms.
Preliminary Model (cont.)
Incorporating technology, we
then have

% k  sky% (n  g  d)k%

The steady state values of y%


k%
variables and % 0 by
are found
k
setting k
which sk
leads to

. y n g  d

 /1
Substituting* this
 sinto the
% 
y k

production function
 n  g  d 
Preliminary Model (cont.)
Rewritingthis in terms of output
per worker, we get:
 /1
 sk 
y (t)  
*
 hA(t)
 n  g  d 
This equation explains why
countries are rich because (a)
they have high investments in
physical capital, (b) spend a large
fraction of time accumulating
skills, (c) have low population
rates and (d) have high levels of
Computing for TFP
 1
Solving A fromy  k (Ah) ,
we get  / 1
 y y
A  
 k h

 With data on output per worker,

capital per worker, and
educational attainment for each
farm, we can use this equation to
estimate actual levels of A.
Problems (1)
Estimates of A computed this way
are like the residuals from growth
accounting: they incorporate any
differences in production not
factored in through the inputs. For
example, we have not controlled for
differences in the quality of
educational systems across
countries, so that these differences
will be included in A.
In this sense, it would be more
correct to refer to these estimates
as total factor productivity levels
rather than technology levels
Problems (2)
 Granger Causality
◦ Regressors could be correlated with the
error terms and the results of the OLS
might be biased by the endogeneity of
the regressors
◦ Direction of causality among productivity
and explanatory variables might also go
from productivity to the explanatory
variables.
◦ Usual econometric analysis might simply
capture correlations, instead of causality.
◦ Solutions:
1. Use instrumental variables to control for the
endogeneity
2. Carry out Granger causality tests in the error
correction panel data, to detect possible reverse
causality among the variables.
Policy Direction: Different
Levels of Education
An attempt will be made to
consider effects of different
schooling levels: primary,
secondary and tertiary.
This can serve as a guide to
policymakers in determining
which types of training are
important towards improving
agricultural productivity.
Data
Panel data collected in the Bicol
Area;

◦ 1975, 1984 and 1994 surveys

◦ Production data on various
agricultural products but more
intensive data for rice
◦ Information available for various
inputs
◦ Barangay data or policy variables
are also available