Chapter 6

Human Capital
Solutions to Problems

1. Assuming the presence and prevalence of malaria within a given country, the
invention of an effective vaccine would shift, upward, the h(y) curve. The implication is
that for any given level of income per capita, the vaccine will increase the health of the
population. Therefore, the level of income per capita remains constant and the level of
health rises by the magnitude of the shift (Movement from Point A to Point B). The
improvement in workers’ health will allow further increases in output that will feed back
into further improvements in health. That is, the vaccine will demonstrate a multiplier

m
er as
effect by increasing output and further increasing health. Graphically, this is shown by
movement along the new h(y) curve from point B to point C. At this point (Point C), the

co
eH w
economy settles into equilibrium.

o.
rs e
ou urc
o
aC s
vi y re
ed d
ar stu

2. Because for any given level of income, Country A will generally be healthier
than Country B, we can determine that the hA(y) curve for Country A will be positioned
sh is

above the hB(y) curve for Country B. In addition, we observe that the income levels of
Th

both countries are identical. (The graphical depiction of this information is given by the
first figure.) This implies that Country A achieves the same level of income as Country
B, even though its workers are healthier. Consequently, it must be the case that the
impact of health on income in Country A must be less, for any given level of health, than
the impact for Country B. That is, yB(h) to be positioned to the right of yA(h). The
equilibrium configuration is depicted in the second figure.

https://www.coursehero.com/file/16671141/CH06/
31
 32 ™ Weil Economic Growth

m
er as
co
eH w
o.
rs e
ou urc
o
aC s
vi y re
ed d
ar stu

3. In the case that education has no effect on productivity, the return to education is
zero. That is, an additional year of education does not raise the productive ability of an
individual. Therefore, the average level of education does not affect the total labor input
sh is

of a country. The population again, determines total labor input of a country. The
subsequent effect on the analysis of education differences among countries is that
Th

schooling differences have no ability to explain why income differs among countries.
Simply put, the return to education h is identical for all countries, and these terms cancel
out in the ratio of steady-state levels of output.

4. The return to education for an individual with 9 years of education is:

(1.134)4 × (1.101)4 × (1.068)1 = 2.60.

In other words, if the wage of an individual with no education is W, the wage paid to this
individual is 2.6 W. Therefore, we can conclude that the payment to raw labor is W and

https://www.coursehero.com/file/16671141/CH06/
 Chapter 6 Human Capital ™ 33

the payment to human capital is the difference between the total wage and the wage for
raw labor. To find the fraction, we compute,

2 .6 − 1
Payment to Human Capital / Total Payment = = 0.615 .
2 .6

The fraction of wages paid to human capital is 61.5%

5. As in Problem 4, the payment to human capital is the difference between the total
wage and the wage for raw labor. Given the wage for raw labor to be $5.15 and the total
wage to be $14.29, we first compute the share of wages paid to raw labor as,

$5.15
Payment to Raw Labor / Total Payment = = 0.3604 .
$14.29

m
er as
The fraction of wages paid to raw labor is 36.03%. For the fraction of wages paid to

co
eH w
human capital, similar calculations reveal,

o.
$14.29 − $5.15
rs e
Payment to Human Capital / Total Payment = = 0.6396 .
ou urc
$14.29

The fraction of wages paid to human capital is 63.96%. (Equivalently, one could just as
o

easily subtract the first number from 1)

aC s

6. In order to find the fraction of wages paid to human capital, we follow the
vi y re

approach outlined in problem 4. We first subtract from each relative wage, the relative
wage paid for raw labor. This amounts to subtracting 1 from the relative wage for every
category. Then, we scale this value, multiplying it by the percentage of people in each
ed d

category. The resulting number is the relative wage paid to human capital for each
ar stu

group. The sum of these numbers over each category, therefore, is the relative wage paid
to human capital for the U.S. Because the total relative wage is simply the sum of the
relative wage of each category multiplied by the appropriate percent, we can now
calculate the fraction of the wage paid to human capital.
sh is
Th

2 .3
Relative Wage Paid to Human Capital / Total Relative Wage = = 0.70.
3 .3

Therefore the fraction of wages paid to human capital is nearly 70%. For the fraction of
wages paid to raw labor, we subtract out previous figure from 1 to get: 1 - 0.70 = 0.30.
That is, the fraction of wages paid to raw labor is 30%.

https://www.coursehero.com/file/16671141/CH06/
 34 ™ Weil Economic Growth

Wage Relative
Total
Years of Relative to Percentage Wage Paid
Relative
Schooling No of People to Human
Wage
Schooling Capital

No Schooling 0 1 0.8% 0 0.008

Partial Primary 4 1.65 4.3% 0.02795 0.07095
Complete Primary 8 2.43 3.9% 0.05577 0.09477
Incomplete Secondary 10 2.77 22.9% 0.40533 0.63433
Complete Secondary 12 3.16 20.0% 0.432 0.632
Incomplete Higher 14 3.61 23.6% 0.61596 0.85196

m
er as
Complete Higher 16 4.11 24.5% 0.76195 1.00695

co
eH w
Sum 2.29896 3.29896

o.
rs e
*The first two columns of the table below are replicated from Table 6.2.
ou urc
7. The relative return to 10 years of schooling is 2.77, and the relative return to 4
years of schooling is 1.65 (from the table above). Denoting hi = 2.77 and hj = 1.65, we
o

can solve for the steady-state ratio for two countries identical in every respect expect for
education as follows:
aC s
vi y re

y i , ss hi 2.77
= = = 1.68.
y j , ss h j 1.65
ed d

Thus, the ratio of output per worker in the steady state is 1.68.
ar stu

8. The relative return to 12 years of schooling is 3.16, and the relative return to 2
years of schooling is (1.134)2 or 1.29. Writing the steady-state ratio for one country over
sh is

time and denoting h 1900 = 1.29 and h 2000 = 3.16, we get:

Th

y 2000, ss h2000 3.16

= = = 2.45.
y1900, ss h1900 1.29

Thus, the ratio of steady-state output per worker for this country over time is 2.45. If
over 100 years, the steady-state output has increased by a factor of 2.45, we can solve for
the growth rate, g, by the following calculation.

g = (2.45) 100 − 1 = 0.009.

https://www.coursehero.com/file/16671141/CH06/
 Chapter 6 Human Capital ™ 35

We conclude that the annual average growth rate of output per worker is 0.9%.

9. There are many examples of positive externalities associated with health. For
instance, being surrounded by healthy people reduces the probability of contracting
disease.

10. Because Country A has a higher rate of growth than Country B, and because both
countries are at the same level of income, the Solow model predicts that Country A is
farther from its steady state level. That is, y A,ss > y B,ss . Furthermore, we are told that the
countries are identical in every respect except for the level of human capital. Therefore,
we can correctly say that

yA,ss > yB,ss implies hA > hB .

m
The level of human capital must be higher in Country A, suggesting that investment in

er as
human capital is higher in Country A as well.

co
eH w
o.
rs e
ou urc
o
aC s
vi y re
ed d
ar stu
sh is
Th

https://www.coursehero.com/file/16671141/CH06/

Powered by TCPDF (www.tcpdf.org)