A New Index of Human Capital to Predict Economic Growth

TL;DR

This paper introduces a novel human capital index that better predicts economic growth than traditional education measures, especially as educational disparities diminish globally.

Contribution

It proposes a new human capital metric less sensitive to homogenized education levels, improving growth prediction accuracy.

Findings

Traditional education proxies' predictive power declined after 1990.

The new index remains a significant predictor in cross-section and panel data.

Educational quantity measures may become obsolete for growth prediction.

Abstract

The accumulation of knowledge required to produce economic value is a process that often relates to nations economic growth. Such a relationship, however, is misleading when the proxy of such accumulation is the average years of education. In this paper, we show that the predictive power of this proxy started to dwindle in 1990 when nations schooling began to homogenized. We propose a metric of human capital that is less sensitive than average years of education and remains as a significant predictor of economic growth when tested with both cross-section data and panel data. We argue that future research on economic growth will discard educational variables based on quantity as predictor given the thresholds that these variables are reaching.