ISSN 2465-6399

Empirical Analysis of the Technological Human Capital, for

Exogenous Solow Economic Growth

Ramanayake, K. D.1

This study explains human capital (Technological Labor) and technological intervention in
the Solow model and its descendants. This study illustrates one of the major applications of
the Solow model, an expose that incorporates human capital, moreover it explains the role of
human capital and technological adaptation using the empirical evidence of human capital and
economic growth in the world. This study is based on a secondary data method while
secondary data is also taken for the analysis and reports. This means that both quantitative and
qualitative methods are meaningfully integrated and present in the discussion. Under results
of this study, empirical evidence shows that the human capital and the physical capital are the
key factors of the productivity growth in the world. Therefore, the average investment rates
in the five richest countries are only 2.9 times larger than the average investment rates in the
five poorest countries. Moreover, education or years of schooling has contributed to the higher
rate of investment. Because of that, the average educational attainment in the five richest
countries is about 8.1 years greater than the average educational attainment in the five poorest
countries. Finally, Human Capital in Solow Model affects the economic and technological
aspects in cross country differences. It is important to understand which of these proximate
cases are significant for economic growth performances. Therefore, if a country’s human
capital and technology usage is higher, that results in improving its GDP growth.

Keywords: Empirical Growth, Human Capital, Solow Model, Technology

Cite this paper as;

Ramanayake, K. D. (2020). Empirical Analysis of the Technological Human Capital, for
Exogenous Solow Economic Growth. The Conference Proceedings of 11th International
Conference on Business & Information ICBI, University of Kelaniya, Sri Lanka. ISSN 2465-
6399, (pp. 164-174)

1
University of Sri Jayawardenepura, Gangodavila, Nugegoda
(kasun.ramanayake@stud.unifi.it)

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Introduction
Human capital not only increases productivity, but it also affects the new technological growth
(Nelson and Phelps ,1996 and Ted Schultz,1964, 1975). The main objective of this study is
introduced as ‘human capital with aggregate productivity relationship to the academic world’.
For that this paper has used the standard Solow model for analyzing the empirical data. The
world believes that the human capital plays an important role in growth models. Here this
study provides a simple presentation of this main objective while discussing how this human
capital may satisfy economic growth. Moreover, human capital not only increases
productivity, but it also affects the new technological growth. Nelson and Phelps (1996) and
Ted Schultz (1964, 1975) introduced this relationship to the academic world. They believed
that human capital had played an important role in growth models. Here this study also
provides a simple presentation of this main objective while discussing how this human capital
may satisfy the economic growth.

Literature review
This section explains the historical and revolutionary relationship between human capital and
production. This ‘economics thoughts’ have been illustrated considering the importance of the
human capital intervention for the growth of economics. Thus this literature illustrates the
theoretical models where exogenous macroeconomist has been used for analyzing the
empirical data in the past. The growth accounting framework introduced and applied in Solow
(1957), Jorgensen, Golop, and Fraumenti (1987) gave an advance improvement to this model.
They also highlighted the measurement strategies and theoretical improvements in the human
capital and the Solow growth model.
The concept of Human capital was introduced by Gary Becker (1965), Ted Schultz (1965)
and Jacob Mincer (1974). The standard models of the human capital used in labor and other
areas of economy have been developed by Beker (1965), Yoram Ben Porath (1967), and
Mincer (1974). After that, this relationship between human capital and Solow growth has been
re-introduced by Heckman, Lochner, and Taber (1998), Jorgensen (2005), Guvenen and
Kuruscu (2006), and Manuelli and Sechadri (2006).
Although technological human capital externalities were introduced by Jacob (1970), Lucas
(1988), and Azariadis and Drazen (1990), they were fist discussed by Marshall (1890). He
argued that the increasing geographical concentration of the inputs increases productivity.
After that Schultz (1965) suggested the role of the human capital in adapting to change and
implementing new technologies. For this explanation, he used agricultural technologies and
human capital. Nelson and Phelps (1966) formulated the same idea and presented a simple
model. Foster and Rosenzweing (1995) provided further evidence for the role of human capital
and economic development. Also, Benhabib and Spiegel (1994), Aghion and Howitt (1998)
reconfirmed this idea.
The augmented Solow model with human capital is a representation of the model presented
by Mankiw, Romer and Weil (1992), which illustrated treating human capital as a separate
factor to the production. They also provided the regression estimation of the Solow model.
Moreover, they introduced estimating the productivity with technology and human capital
across the world. After Klenoew and Rodriguez (1997), Hall and Jones (1999) and Klenoew
and Rodriguez (1997) took it to their shoulders to develop this further. Recent
macroeconomics models that feature human capital include Galor and Tsiddon (1997),
Geenwood and Yorukolu (1997), Caselli (1999) and Moav (2000) as well as Howitt and
Voilante (2004).

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Human capital with Solow model

Gregory Mankiw, David Romer, and David Weil published an important paper in 1992 titled
“A Contribution to the Empirics of Economics growth”. It evaluated the empirical implication
of the Solow model and concluded that it performed very well. Then they identified that this
model could improve even more if the human capital is included; that is, including labor in
different economic conditions and educational skills. Extending the Solow model to include
human capital or skilled labor is relatively straightforward as we will show in the following
section:
Suppose that output, 𝑌 in an economy is produced by accumulating the capital, 𝐾 with the
skilled labor . According to the condition of constant returns, this is shown by Codd Douglass
production function where A shows labor augmenting technology that grows at the rate of g.
𝑌 = 𝐾 ∝ (𝐴𝐻)1−∝ , (1)
In this economy, human capital is accumulated by spending time learning new skills instead
of working. Let 𝑢 represent the function of an individual’s time spent on learning skills and
let 𝐿2 show the total amount of labor used in production in the economy. We use the
assumption that unskilled labor 𝑢 generates the labor of 𝐻. It shows that,
𝐻 = 𝑒 𝜑𝑢 𝐿, (2)
𝜑 is a positive constant parameter. Notice that if 𝑢 = 0 then = 𝐿 . This means that all the
employees are unskilled. Increasing 𝑢, a unit of unskilled labor, increases the effective unit of
skilled labor 𝐻. Simply, when the unskilled labor spends time to learn necessary skills, it
results in increasing the skilled labor of the economy. Let’s use the log and derivatives for (2),
𝜕 log 𝐻 𝜕𝐻
=𝜑→ = 𝜑𝐻. (3)
𝜕𝑢 𝜕𝑢

Let’s think u increases by 1 unit (suppose this is one additional year of schooling) and think
𝜑 = 0.10. In this case, H rises by 10 percent. Namely, φ is the positive parameter of the human
capital. The case above proportionally affects to drive the exponentiation 𝑒 in the equation.
This case is included in a number of literatures in the education and labor economics which
reinforces that an additional year of schooling increases the wage of an individual worker.
Physical capital is composed by the investment rate of the economy.
𝐾̇ = 𝑌𝑠𝑘 − 𝑑𝑘 (4)
Here, 𝑠𝑘 is the investment rate of the physical capital and 𝑑 is the constant depreciation rate.
Now we estimate this model using the mathematical concept. First, we let lower case letters
of the equation be divided by the stock of unskilled labor, L, and rewrite the aggregate
production function in terms of output per worker. It is given by,
𝑦 = 𝑘 ∝ (𝐴ℎ)1−∝ (5)
𝜑𝑢
Here, ℎ = 𝑒 it illustrates how a person takes the dissection, how much time is spent on
improving his skills instead of working. Notice that here we will assume that 𝑢 is constant
and it is given exogenously.

2
𝐿 = (1 − 𝑢)𝑃, 𝑃 is the total population of the economy.

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Note that ℎ is constant, which means that the production function (4.5) is similar to the basic
Solow model balance of growth path. According to that, 𝑦 and 𝑘 grow at the constant rate 𝑔
and the rate of technological progress in given time 𝑡.

Steady state and the human capital

This model is estimated by considering the steady-state variable. This state variable is constant
along a balanced growth path. Let’s recall that the steady state variables were terms such as
𝑦/𝐴. At this point h is constant and we can define the state variables by defining 𝐴ℎ. Given
these steady variables with the tilde, the equation (5) implies that,
𝑦̃ = 𝑘̃∝ (6)
It was mentioned that the capital accumulation equation can be written in terms of the new
steady state variables as,
𝑘̌ ì = 𝑦̃𝑠𝑘 − (𝑛 + 𝑔 + 𝑑)𝑘̃ (7)
This equation (7) was solved. Therefore, we are not including the stages of solving the
equation here. What we are doing here is adding human capital to the dynamic Solow model.
The steady state value of 𝑘̃ and 𝑦̃ is found by setting 𝑘̃ ì = 0 . It is shown by,
̃
𝑘 𝑠𝑘
= (8)
𝑦̃ 𝑛+𝑔+𝑑

Substitute this condition into the equation (6), we can find the steady state value of the output
per technological ratio 𝑦̃ given by,
𝑠𝑘 ∝/(1−∝)
𝑦̃ ∗ = ( ) (9)
𝑛+𝑔+𝑑

Rewriting this in terms of output per worker shows,

𝑠𝑘 ∝/(1−∝)
𝑦̃ ∗ (𝑡) = ( ) ℎ𝐴(𝑡) (10)
𝑛+𝑔+𝑑

The reason for including t in the equation (10), reminds us which variables are growing over
time.
In summarizing this section, we have discussed the theatrical explanation of Solow model as
to why some countries are rich and some are poor. The reason simply is that the rich countries
have a higher investment rate of technology, human capital, and physical capital which
enables them to invert a large fraction of time to make human capital and labor skills.
Therefore, in the steady state, per capital output grows at the rate of the technological
progress𝑔, as in the basic Solow model. In the next section we will discuss the major role of
human capital in technology.

Human capital for technology

Human capital not only increases productivity, but it also affects the new technological
growth. Nelson and Phelps (1996) and Ted Schultz (1964,1975) introduced this relationship
to the academic world. They believed that human capital had played an important role in
growth models. Here we provide a simple presentation of this main aspect while discussing
how this human capital may satisfy the economic growth.

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Consider the flowing model to represent the basic ideas of the model. Suppose that the
aggregate output in the economy is given by where L is the constant labor force and A(t) is
the technology level of the economy.
𝑦(𝑡) = 𝐴(𝑡)𝐿, (11)
There is no marginal capital accumulation or labor supply, and the only variable that changes
over time is technology, 𝐴(𝑡).
Suppose that 𝐴𝐹 (𝑡) is the world technological frontier. This has not yet been applied to the
production process because this frontier might correspond to technology in some countries.
Suppose that 𝐴𝐹 (𝑡) evolves exogenously according to the differential equation. This is given
by,
𝐴̇𝐹 (𝑡)
= 𝑔𝐹 , 𝐴𝐹 (𝑜) > 0 (12)
𝐴𝐹 (𝑡)

ℎ is the human capital of the labor forces. But notice that ℎ is not included in (4.12) the
production functions because human capital does not play a productive role in this equation.
Instead the only role of human capital in the current model is to facilitate the implementation
and the use of frontier technology in the production process. Let’s evaluate the technological
level of the country due to (𝑡) . But here, A(t) is governed by a different equation.
𝐴̇𝐹 (𝑡) = 𝑔𝐴(𝑡) + ∅(ℎ)𝐴𝐹 (𝑡), (13)
In the initial condition of this, 𝐴(0), situated between zero and the minimum value of the
world technological frontier, can be represented as 𝐴(0) ∈ [0, 𝐴 𝐹 (0)].The parameter 𝑔 is
strictly less than the 𝑔𝐹 and measures the growth rate of technology, 𝐴(𝑡), resulting from the
collaboration of the other sources of production growth. Firstly, before everything we need to
improve the technology in this equation (4.13) because technological improvement generates
implementation and adoption of frontier technologies. The extent of the second source of
improvement is determined by the average human capital of the workforce, ℎ. Therefore, the
role of the human capital in the context of adoption and adaptation of technology is illustrated
by the second sources, ∅. Suppose that ∅ is in nondecreasing function and it satisfies this
condition as shown below where, ℎ̅ > 0.,
∅(0) = 0 𝑎𝑛𝑑 ∅(ℎ) = 𝑔𝐹 − 𝑔 > 0 ̅3
and for all ℎ ≥ ℎ, (13)
This specification illustrates that the human capital of the workforce regulates the capability
of the economy to collaborate with new developments highlighted in the frontier technologies.
Suppose that the workforce had no human capital. Then what happens to the frontier
technology? Simply, if the workforce has no human capital, there is no adoptions or
implantations of the frontier technologies and 𝐴(𝑡) grows at the rate 𝑔. In situation ℎ̅ > 0,
there is a rapid growth in the technologies. Therefore, the ratio of the country’s technology to
the frontier technology is also determined by the human capital. It is given by,
∅(ℎ)
𝐴(𝑡) → 𝐴𝐹(𝑡) (14)
𝑔𝐹−𝑔

Initial situation here is (𝑡 → ∞).

Nelson and Phelps (1996) emphasized the role of human capital in several situations. For
example, vintage empirical evidence illustrates that educated farmers are more likely to adopt

3
ℎ̅ is no skills labor or no human capital

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new technologies and seeds (Foster & Rosenzweig, 1995). Nelson Phelps’s model shows that
there is a strong relationship between the economic growth and the level of human capital.
Also, they determined that there is another strong correlation between economic growth and
changes in the human capital. Benhabib and Spiegel (1994) suggest the same result because
the key role of the human capital is not to increase productivity capacity, but to improve
technological adaptations of the economy. According to them, if the role of human capital in
facilitating the technology adoption is taking place within the boundaries of the firm, then this
will affect the marginal productivity of capital and earnings of the skilled labors. Workers will
generate a faster and more effective technological adaptations, which would be combined with
the increase in the net present value of the firm. Moreover, human capital facilitates
technology adaptation not only in the firms but also in the labor market. Simultaneously,
human capital generates a number of social externalities. These externalities are injected to
the external and internal level to benefit at a global level. The next section of this chapter will
illustrate this human capital contribution for economic growth according to the global cross-
country empirical data.

Empirical analysis of the human capital in economic growth and technology

Robert e. Hall and Charles I. Jones (1999) published a very interesting paper called "Why do
some countries produce so much more output per worker than others". This paper illustrates
the relationship between human capital and aggregate output growth in 127 countries in the
world. For this, they used Solow relationships with the human capital model introduced by
Mankiw, Romer, and Weil (1992) and Dougherty and Jorgenson (1996). Robert and Jones
(1999) used three different equations for their analysis.
First,
𝑌(𝑡) = 𝐾 ∝ (𝐴𝐻)1−∝ (15)
where 𝑌 is aggregate output. 𝐾 denotes the stock of physical capital. 𝐻 is the amount of human
capital or capital augmented labor used in production and 𝐴 is the labor augmented
technological production. Suppose that 𝐿 is homogeneous in the economy; each labor has been
trained with E years of schooling. According to this 𝐻 is given by.,
Second,
𝐻(𝑡) = 𝑒 ∅(𝐸) 𝐿(𝑡) (16)
Mincer (1974) introduced this specification, called “Mincerin wage regression”, which
reflects the efficiency of a unit of labor with E years of schooling. An additional year of the
schooling increases the efficiency of the ∅(𝐸). Note that if ∅(𝐸) = 0 all of E in standard
production functions with undefined labor condition or we may say unskilled labor with
production functions.
Third,
𝐾 ∝(1−∝)
𝑦(𝑡) = ( 𝑡) ℎ𝑡 𝐴𝑡 (17)
𝑌𝑡

According to the Solow conditions, (17) shows production function in terms of output per
worker, 𝑦 = 𝑌/𝐿, and ℎ = 𝐻/𝐿 is human capital per worker.
Then, let’s measure productivity and difference in output per worker, in to difference in capital
accumulations, human capital per work, and aggregate productivity in the economies. We use
data on output labor input, average education, and physical capital for the year 1988.

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Table 1 illustrates the value of capital per workers in different countries. These values are
decomposed by the output in three multiplicative terms in the equation (17). The three terms
are namely, the physical capital intensity, the contribution from human capital per worker,
and the generating productivity.
Comparisons to the data of the countries illustrated in Table 1, show that output per worker in
Canada is about 94 percent of that in the United States. Canada and USA have the same capital
intensity, but there’s only 91 percent of USA human capital per worker. Canadians have a
lower output per worker but, compared to the USA, they manage the same productivity rate.
Other OECD economies such as the United Kingdom also have productivity levels close to
the productivity in the U. S. Italy and France are slightly higher; Germany is slightly lower.

Table 1: Productivity Calculations: Ratios to U. S. Values year 1988

Country 𝒀/𝑳 𝑲𝒕 ∝(𝟏−∝) 𝑯/𝑳 𝑨
( )
𝒀𝒕
USA 1.000 1.000 1.000 1.000
Canada 0.941 1.002 0.908 1.034
Italy 0.834 1.063 0.650 1.207
West Germany 0.818 1.118 0.802 0.912
France 0.818 1.091 0.666 1.126
UK 0.727 0.891 0.808 1.011

Hong Kong 0.608 0.741 0.735 1.115

Singapore 0.606 1.031 0.545 1.078
Japan 0.587 1.119 0.797 0.658
Mexico 0.433 0.868 0.538 0.926
Argentina 0.418 0.953 0.676 0.648
U.S.S.R 0.417 1.231 0.724 0.468

India 0.086 0.709 0.454 0.267

China 0.060 0.891 0.632 0.106
Kenya 0.056 0.747 0.457 0.165
Zaire 0.033 0.499 0.408 0.160

Average, 127 countries 0.296 0.853 0.565 0.516

Standard deviation 0.268 0.234 0.168 0.325
Correlation with Y/L (logs) 1.000 0.624 0.798 0.889
Correlation with A (logs) 0.889 0.248 0.522 1.000
Source: Hall and Charles I. Jones (1999)4
U.S.S.R. has an extremely high physical capital and a relatively higher human capital but a
rather low productivity level. All developing countries in the table show differences in
productivity and the different values of output per worker. For example, India’s output per
worker is about 8 percent of that in the United States. The lower productivity has affected the

4 Notice that the elements of this table are empirical counterparts to the components in the
equation (4.14). All the rations to the U.S.A Value and this means that the first column of data
is the product of the other three columns.

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low output per worker, because the total productivity cannot be improved without the human
capital and technology, which in turn improves the output per worker.
Last four columns of (Table 1) illustrate the average and standard deviation of the
collaboration of inputs and productivity to differences in output per worker. According to the
data, output per worker in the five countries in 1988 with the highest levels of output per
worker was 31.7 times higher than the output per worker in the five lowest countries. Let’s
find out the factors of this result in 1988.A relatively small difference was due to physical and
human capital: differences in capital intensity and human capital per worker are contributing
factors of 1.8 and 2.2, respectively, to the difference in output per worker. Therefore, the
human capital and the physical capital are the key factors of the productivity growth in the
world in 1988. Moreover, education or years of the schooling contributed to the higher rate of
investment. Therefore, the average investment rates in the five richest countries are only 2.9
times larger than the average investment rates in the five poorest countries. Because of that,
the average educational attainment in the five richest countries is about 8.1 years greater than
the average educational attainment in the five poorest countries. However, Table 2 proves a
significant correlation between human capital and technological capital again in OECD and
non-OECD countries

Empirical evidence of the human capital and technology

Following Benhabib and Spiegel (1994) we will empirically assess the influence of human
capital on growth and technology adoption using cross-country growth regressions. The
preferred empirical specification in Benahbib and Spiegel (1994) is as follows. We use the
Nelson and Phelps (1996) model to explain this condition which we discussed in section 4.3.
𝑦𝑚𝑎𝑥
(𝑙𝑛𝑌𝑖𝑇 − 𝑙𝑛𝑌𝑖0 ) = 𝛽0 + 𝛽1 𝐻1 + 𝛽2 𝐻1 [ ] + 𝛽3 (𝑙𝑛𝐾𝑖𝑇 − 𝑙𝑛𝐾𝑖0 ) + 𝛽3 (𝑙𝑛𝐿𝑖𝑇 − 𝑙𝑛𝐿𝑖0 ) + 𝜀
𝑦𝑖
Where 𝑌𝑖 is the aggregate production or GDP in the country, 𝐾𝑖 is the physical capital stock of
the country, 𝐿𝑖 and 𝐻𝑖 is the labor force and human capital in the economy. The annual average
𝑦
of schooling in the labor forces in between period 0 and period 𝑇 𝑚𝑎𝑥 is a measure of the
𝑦𝑖
catching-up effect, which is the ratio of income per capital in the richest country that can be
interpreted as the technological gap in the developing or poor countries. Human capital of the
economy is assumed to affect the technological progress by having an influence on the
𝑦
domestic innovation, 𝛽1 𝐻1 and on the collaboration of foreign technology, 𝛽2 𝐻1 [ 𝑚𝑎𝑥].
𝑦𝑖

Table 2 represents the result of this estimation using the human capital variable in 1994 and
using the IIASA/VID database. The data illustrates the full sample of OECD countries and
non-OECD countries in the world. There was another database in Table (2). Using this second
database of Kyriacou (1991) we can explain the effects of the education level of labor in
technology adaptation in the OECD and the non-OECD countries in 1994. Firstly, let’s
analyze Table 2.

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Table:2: Benhabib and Spiegel (1994) regressions.

Kyriacou Data IIASA/VID Data

Full Sample OECD Non-OECD Full Sampl OECD Non-OECD

H -0.014 -0.015 -0.025 -0.023 -0.018 -0.053
(0.014) (0.012) (0.022) (0.009) (0.011) (0.022)
𝒚𝒎𝒂𝒙 0.0006 0.004 0.007 0.005 0.007 0.005
𝑯𝟏 [ ].
𝒚𝒊 (0.001) (0.003) (0.001) (0.001) (0.004) (0.002)
𝒍𝒏𝑲𝒊𝑻 − 𝒍𝒏𝑲𝒊𝟎 0.472 0.551 0.482 0.502 0.433 0.532
(0.072) (0.106) (0.092) (0.063) (0.443) (0.101)
𝒍𝒏𝑳𝒊𝑻 − 𝒍𝒏𝑳𝒊𝟎 0.188 0.197 0.264 0.064 0.262 0.090
(0.164) (0.160) (0.278) (0.166) (0.135) (0.345)
Obs 78 19 59 62 19 43

𝑹𝟐 0.70 0.90 0.67 0.63 0.90 0.58

According to the results of IIASA/VID for the OECD sample, a 10 percent significant
parameter for educational level affects the technological adaptation but this adaptation only
appears significant for the non-OECD sample. Moreover, there are significant positives as
well as negative effects of not having a human capital variable when using the full sample and
the non-OECD countries. Non-OECD countries imply that the overall effect of human capital
on growth is positive for the OECD group level of their GDP per worker and it is lower than
10 percent of the OEDS countries in the sample.
Next, we illustrate the differentiation of the technological absorption between developed and
developing countries. For this Benhabib and Spiegel (1994) re-ran the regression using the
education by age group of the OECD and non-OECD countries. After that, the new regression
shows the individual inclusion of each human capital variable. According to this, non-OECD
countries do not appear significantly different in the age groups, but on the other hand, OECD
sample shows that the human capital level corresponding to the young age group interacts in
a significant level of development in technology and human capital.

Conclusion
In conclusion, according to this analysis, this study illustrates how lower productivity has
affected the low output per worker, because the total productivity cannot be improved without
the human capital and technology, which in turn improves the output per worker. Moreover,
on the one hand it can be seen that the time spent on the education of the workers and the
youth, generated a significant DGP growth across the countries. On the other hand, the
education level of the workers or the youth absorb the technological improvement in the
developed economics. Finally, one of the most important factors we learn in this study is, how
‘Human Capital in Solow Model’ affects the economic and technological cross country
differences. It is important to understand which of these proximate cases are significant for
economic growth performances. But some level of developments show that a country is poor
because it has insufficient human capital, physical capital, and technology. Another
significant point is that in the countries with an abundant human capital and technology, there
are factors that cause one person to have more money than the other person, namely the
income inequality of the economy. A good understanding of the economic growth and

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Faculty of Commerce and Management Studies, University of Kelaniya, Sri Lanka
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differences in the production functions proved that the engine of economic growth is
technology and human capital, therefore these findings provide inputs for designing policies
for the improvement of the human capital with exogenous growth around the world.

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