Human Capital: Education and Health in Economic Development

Chapter 8
Human Capital:
Education and
Health in
Economic
Development
Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

Development & Human Capital
• Health and education are investments in

human capital to improve labor productivity
• Investment in human capital is a major

determinant of growth and development
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• Investment in health increases the return to

investment in education
• Investment in education increases the return

to investment in health

• Economic growth would not lead to substantial

increases in investment in children’s education
and health
• Better educated mothers tend to have educated

and healthy children
• Market failure in education and health requires

policy action

Determinants of Education Demand
• Wage or income differential paid to workers

with various levels of education
• Probability of success in finding a job in the

formal sector
• Direct private cost of education (e.g., tuition)
• Indirect or opportunity cost of education (i.e.,

foregone income)
Return of Investment in Education
• Initial investments in education lead to a

stream of higher future income
• The present discounted value of this stream

of future income is compared to the cost of
education

The Economics of Education

Age-earnings Profiles by Level of
Education: Venezuela, 1989

Child Labor in LDCs
• Some 120 million children work full-time
• Some 150 million children work part-time
• Of these 250 million working children

– 61% or 153 million in Asia
– 32% or 80 million in Africa
– 7% or 17 million in Latin America

Child Labor in LDCs
• Child labor is a common practice in LDCs
labor markets
• The problem may be modeled using the

“multiple equilibria” approach
• Government intervention is needed to move

to a ‘better’ equilibrium

Market for Child Labor
Adult Labor Supply Adult & Child Labor

A T Supply
Wage • At WE1 labor supply is AA’
• As children enter the market, wage falls
• At WL adult and child labor supply is TT’
WE1 E1 • At WE2, OA’ of adult and A’T’ children
WH are employed; a ban on child labor
B
WL C • moves E2 to E1
The S-shaped curve is supply of child
WE2 E2 labor between these wages: E1BCE2
A’ T’ Demand for Labor
Employment

The Education Gender Gap
Females receive less education than males in LDCs. To close the gap
• The rate of return on education is higher for female than male
• Female education increases productivity and lowers fertility
• Educated mothers raise educated children
• Female education helps break the vicious cycle of poverty and

inadequate schooling for women

Male and Female Education
Rates, 2004

The Education Gender Gap
Consequences of gender bias in health and

education
• Economic incentives
• Cultural setting
• Increase in family income does not always

lead to better health and education
Social vs. Private Returns of Education
• Social and private returns of education are

higher in LDCs than MDCs
• Private returns are higher than social returns
• Social and private returns are higher for

primary than secondary and higher
education

Rate of Return to Investment in
Education

Optimal Level of Education
• Optimality criterion for education: maximum

difference between returns and costs
• Social: the optimal level of education is “primary”

where costs are subsidized and returns are high
• Private: the optimal level of education is “higher”

where costs are heavily subsidized and returns are
very high

Social Costs & Returns
Costs/Returns Social Returns
Social Costs
Tertiary
Secondary
Primary
Public decision: Invest in primary education
Years of schooling completed

Private Costs & Returns
Private Returns
Costs/Returns
Tertiary Private Costs

Secondary
Primary
Private decision: Invest in higher education
Years of schooling completed

Education and Development
• Distribution of education
– Lorenz curves for the distribution of education
• Education Inequality and Poverty

Lorenz Curves for Education
in India and South Korea, 1990

Gini Coefficients for Education in
85 Countries, 1990

Health-Care and Development
Measurement and distribution
• Life expectancy at birth

• Child mortality
• Malnutrition and hunger

Life Expectancy in World Regions

Under-5 Mortality Rates in Various
World Regions

Proportion of Children under 5 Who Are
Underweight, 1990 and 2005

Deaths of Children under Age 5

Children’s Likelihood to Die in LDCs

Regional HIV and AIDS Statistics,
2006

Health-care and Development
• Disease burden
• HIV/AIDS infection
• Malaria
• Parasitic Worms and Other “Neglected
Tropical Diseases”

The Major Neglected Tropical Diseases,
Ranked by Prevalence

Health Systems and
Development
• Health and Productivity
– Is there a connection?
• Health Systems Policy

– Great variability in the performance of health
systems at each income level

GNI per Capita and Life
Expectancy at Birth, 2002

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Chapter 8

Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

• Health and education are investments in

• Investment in human capital is a major

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 8-2

• Investment in health increases the return to

• Investment in education increases the return

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 8-3

• Economic growth would not lead to substantial

• Better educated mothers tend to have educated

• Market failure in education and health requires

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 8-4

• Wage or income differential paid to workers

• Probability of success in finding a job in the

• Direct private cost of education (e.g., tuition)

• Indirect or opportunity cost of education (i.e.,

• Initial investments in education lead to a

• The present discounted value of this stream

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 8-6

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 8-7

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 8-8

• Some 120 million children work full-time

• Some 150 million children work part-time

• Of these 250 million working children

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 8-9

• The problem may be modeled using the

• Government intervention is needed to move

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 8-10

Adult Labor Supply Adult & Child Labor

A’ T’ Demand for Labor

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 8-11

• The rate of return on education is higher for female than male

• Female education increases productivity and lowers fertility

• Educated mothers raise educated children

• Female education helps break the vicious cycle of poverty and

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 8-12

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 8-13

Consequences of gender bias in health and

• Increase in family income does not always

• Social and private returns of education are

• Private returns are higher than social returns

• Social and private returns are higher for

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 8-15

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 8-16

• Optimality criterion for education: maximum

• Social: the optimal level of education is “primary”

• Private: the optimal level of education is “higher”

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 8-17

Costs/Returns Social Returns

Years of schooling completed

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Tertiary Private Costs

Private decision: Invest in higher education

Years of schooling completed

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• Education Inequality and Poverty

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 8-20

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Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 8-22