Augmented Human Capital: A Unified Theory and LLM-Based Measurement Framework for Cognitive Factor Decomposition in AI-Augmented Economies

TL;DR

This paper develops a framework to decompose human capital into components and measures AI's impact on wages using occupational data, revealing that formal sector workers benefit from AI augmentation while informal workers do not.

Contribution

It introduces a novel decomposition of human capital and a measurement framework for AI augmentation effects, validated with empirical data from Colombia.

Findings

AI increases wages for augmentable cognitive workers in the formal sector.

Informal workers do not benefit from AI augmentation, showing institutional constraints.

Augmentation premiums are higher for experienced workers and in health and education sectors.

Abstract

This paper proposes a decomposition of human capital into three orthogonal components -- physical-manual (H^P), routine-cognitive (H^C), and augmentable-cognitive (H^A) -- and develops a production function in which AI capital interacts asymmetrically with these components: substituting for routine cognitive work while complementing augmentable cognitive work through an amplification function phi(D). I derive a corrected Mincerian wage equation and show that the standard specification is misspecified in AI-augmented economies. Using LLM-generated measures of occupational augmentability for 18,796 O*NET task statements mapped to 440 Colombian occupations, merged with household survey microdata (N = 105,517 workers), I estimate the augmented Mincer equation. The wage return to H^A increases with AI adoption in the formal sector (beta_2 = +0.051, p < 0.001), while informal workers cannot capture augmentation rents (beta_2 = -0.044). A triple interaction confirms formality as the binding mechanism (beta_{AHC x D x Formal} = +0.272, p < 0.001). The augmentation premium is strongest for experienced workers (ages 46-65) and in health and education sectors. These results provide the first developing-country evidence of cognitive factor decomposition in AI-augmented labor markets and demonstrate that the binding constraint on human-AI complementarity in the Global South is not technology access but labor market institutions.