Testing Human Capital theory: a case study of Canada within the World
European journal of contemporary economics and management
Human capital had evolved macroeconomic models removing the single use of TFP when modeling world income disparities. A recent development from Manuelli and Sehadri had suggested that human capital and its evolution can be measured within an income generation framework. Similarly to Ben Porath's models, their model uses returns to human capital and to goods as well as ability and fertility rates, but in addition incorporates years of education and wages. The purpose of this paper is to test the
... aper is to test the suitability of Manuelli and Seshadri's theory on the Canadian context, first I used their model to estimate total factor productivity and check its ranking across provinces and territories of Canada. Then I return to the global context and attempt to validate the model by comparing estimated variables with their observed (or estimated elsewhere) counterparts. Finally, I test the sensitivity of the model's parameters, to identify to which parameters the modeler shall pay more attention. It was found that returns to human capital and to goods played a vital role. I attempted to estimate their values from world data, only to find that returns to goods seems stable across the world at around 0.37 to 0.40, while world returns to human capital vary largely between countries with world average at 0.14 and Canada or USA values at 0.48, suggesting that human capital used to accumulate more human capital 102 is key from a development perspective and that countries should encourage learning throughout the life of productive individuals.