According to T.W. Schultz, the returns to human capital are highest in economic environments experiencing unexpected price, productivity, and technology shocks that create "disequilibria." In such environments, the ability of firms and individuals to adapt their resource allocations to shocks becomes most valuable. In the case of negative shocks, government policies that mitigate the impact of the shock will also limit the returns to the skills of managing risk or adapting resources to changing market forces. In the case of positive shocks, government policies may restrict access to credit, labor, or financial markets in ways that limit reallocation of resources toward newly emerging profitable sectors. This paper tests the hypothesis that the returns to skills are highest in countries that allow individuals to respond to shocks. Using estimated returns to schooling and work experience from 122 household surveys in 86 developing countries, this paper demonstrates a strong positive correlation between the returns to human capital and economic freedom, an effect that is observed throughout the wage distribution. Economic freedom benefits those workers who have attained the most schooling as well as those who have accumulated the most work experience.
Details
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Author
King, Elizabeth M. Montenegro, Claudio E. Orazem, Peter F.
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Document Date
2010/08/01
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Document Type
Policy Research Working Paper
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Report Number
WPS5405
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Volume No
1
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Total Volume(s)
1
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Country
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Region
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Disclosure Date
2010/08/30
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Disclosure Status
Disclosed
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Doc Name
Economic freedom, human rights, and the returns to human capital : an evaluation of the Schultz hypothesis
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Keywords
returns to schooling;human capital;economic freedom;rate of return on capital;protection property right;economic institution;foreign direct investment;real gross domestic product;empirical measure;Poverty & Inequality;efficiency of resource allocation;access to new technology;life expectancy at birth;human capital investment;years of schooling;equal right;private return;Rule of Law;labor market institution;world income inequality;access to women;difference in returns;allocation of resource;labor market performance;cross country variation;labor market policy;inequality within country;return to education;per capita income;department of economics;return to investment;effects of corruption;privatization of state;corruption in government;international economic development;freedom of religion;taxation of land;women in parliament;international capital flow;freedom of speech;freedom of movement;right of women;misallocation of resources;relative labor demand;difference in income;increase in inequality;segments of society;rate of growth;proportion of woman;democratic political system;increase wage inequality;progressive tax rate;rural labor market;effects of education;aggregate household income;demand for school;culture of capitalism;list of countries;net present value;rates of return;impact of shock;resource allocation decision;distribution of return;labor market earning;labor market outcome;
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Citation
King, Elizabeth M. Montenegro, Claudio E. Orazem, Peter F.
Economic freedom, human rights, and the returns to human capital : an evaluation of the Schultz hypothesis (English). Policy Research working paper ; no. WPS 5405 Washington, D.C. : World Bank Group. http://documents.worldbank.org/curated/en/171921468333064416/Economic-freedom-human-rights-and-the-returns-to-human-capital-an-evaluation-of-the-Schultz-hypothesis