Human Capital Essay Example

Human capital plays an important role in the theory of economic growth, but it has been difficult to measure this abstract concept. We survey the psychological literature on cross-cultural IQ tests, and conclude that modern intelligence tests are well-suited for measuring an important form of a nation's human capital. Using a new database compiled by Lynn and Vanhanen (2002), we show that national average IQ has a robust positive relationship with economic growth. Using a methodology derived from Sala-i-Martin (1997a), we show that in growth regressions that include only robust control variables, IQ is statistically significant in 99.7% of these 1330 regressions. A strong relationship persists even when OECD countries are excluded from the sample. A 1 point increase in a nation's average IQ is associated with a persistent 0.16% annual increase in GDP per capita.

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*Corresponding Author: Garett Jones, Department of Economics and Finance, Southern Illinois University, Edwardsville, IL, 62026-1102, [email protected], www.siue.edu/~garjone. W. Joel Schneider, Department of Psychology, Illinois State University, Normal, IL, 61790.

The concept of human capital holds an important place in the theory of economic growth. However, the question of just how to measure a nation's stock of human capital is an unresolved issue in empirical growth research. Mankiw, Romer, and Weil (1992) kindled interest in empirically testing a Solow model that included human capital. They used a nation's average years of secondary education as their proxy for human capital. Other researchers, most notably Sala-i-Martin (1997a,b), have considered primary school enrollments as one reasonable measure of human capital.

While economists commonly use education as a proxy for human capital, this widespread practice has coexisted with longstanding doubts about using school enrollments as a measure of human capital. This is because it is widely believed that educational outcomes are ultimately what matter for producing human capital, not just the quantity of educational inputs.

The ability to solve problems, to think creatively, to recall facts and to reinterpret those facts in the light of changing circumstances: these are some of the key elements that economists seem to be thinking of when we think about "human capital." In describing human capital this way, we are setting aside discussion of job-specific human capital, the creation of which is analyzed in theoretical labor market models. General-purpose human capital has been the focus of growth research, and it is here that we place our focus in this paper.

Fortunately for economists, psychologists spent the 20th century putting a great deal of energy into refining and improving upon one valuable technique for measuring this particular type of human capital: The intelligence test.

We use a new database of IQ tests from 70 countries in growth regressions that evaluate the explanatory power of IQ. These regressions include combinations of the 21 growth variables that passed Sala-i-Martin's (1997) robustness test. Out of these 1330 regressions, IQ was statistically significant in 99.7% of them.

We also evaluate the explanatory power of IQ in growth regressions that include Sala-i-Martin's education measures. Among these 56 education-related regressions, IQ was statistically significant in every one, thus passing not only Sala-i-Martin's robustness test, but also Leamer's (1983, 1985) extreme bounds test. By comparison, in Sala-i-Martin's original paper, only one education measure-average primary school enrollment-passed a robustness test. While one might expect that at least some linear combination of primary, secondary, and higher education measures could eliminate the statistical significance of IQ, we did not find this to be the case.

As final robustness check, we also show strong results for IQ when OECD countries are completely excluded from the sample. This evidence helps to address the concern that IQ tests are culturally biased in favor of people living in the developed world. We also show that, in all cases, including IQ in the regressions appears to diminish the robust statistical and economic significance of primary school enrollment.

Our IQ-based results bolster the conclusions of Hanushek and Kimko (2000), who found that international mathematics and science test scores from 31 countries were strongly positively correlated with growth; the authors use interpolation methods to expand the sample to a total of 80 countries, with similar results. Hanushek and Kimko consider the math and science scores to be indications of "labor quality." It appears that IQ should likewise be considered as another robust measure of a nation's labor quality.

The results presented here imply that a 10-point increase in national IQ will persistently raise a nation's average growth rate by 1.6%. The relationship between IQ and growth appears to be economically large and statistically robust, and provides more reliable results than other education measures. Therefore, risk-averse policymakers would do well to include changes in IQ as a reliable measure of changes in their nation's stock of productivity-enhancing human capital. We discuss below some of the policies--including improvements in early childhood nutrition, a healthier environment, and parental literacy--that appear to be effective at increasing this measure of human capital in developing countries.

Cross-cultural tests of intelligence and human capital formation

In a country such as the United States in which the average person rates his or her own intelligence at roughly one standard error above the mean (Furnham, 2001), IQ tests are bound to be regarded by many with suspicion and ill-will. More seriously, egalitarians are skeptical of the validity of IQ tests when group differences in cognitive ability are reported. Undoubtedly, there are few topics within the discipline of psychology that have generated as much controversy as have IQ tests. Criticisms of IQ tests found in public discourse range from the subtle and sophisticated to the misinformed and absurd. It is not our purpose to address every objection that can be made about the validity of IQ tests. In a sense, controversial matters such as to what degree individual differences in IQ are genetically mediated or to what degree IQ tests are biased against people of various groupings (e.g., by sex, class, race, or ethnicity) are irrelevant to our thesis: As we demonstrate below, differences in IQ, whatever their origins and influences, appear to reflect differences in a type of human capital strongly associated with long-term economic growth.

IQ--short for Intelligence Quotient--refers to one's relative average performance compared to one's same-age peers on a wide variety of tests of cognitive ability. Compared to tests such as the SAT or ACT (which have components that are similar to components of IQ tests), the range of tasks and problems in IQ tests is extremely broad. Although the public tends to conceptualize intelligence as primarily consisting of verbal knowledge and high academic performance (Flugel, 1947; Shipstone & Burt, 1973), IQ tests measure a wide variety of cognitive abilities with general knowledge and verbal reasoning given equal status with other important capacities such as spatial reasoning, inductive and deductive reasoning, quantitative reasoning, verbal fluency, memory retrieval fluency, short-term memory, long-term memory, phonological awareness, reasoning speed, perceptual speed, simple decision speed, and many others. The advantage of including a wide variety of tasks in an IQ test is that a person's score will not be unduly influenced by idiosyncratic strengths and weaknesses on specific tasks.

Although it can be helpful to consider the peaks and valleys of a person's performance of the different tasks, vast quantities of research indicate that it is the mean elevation of the profile (which is reflected in the Full Scale IQ) and not the specific patterns of strengths and weaknesses that account for virtually all of an IQ test's predictive validity (Ree, Carretta, & Green, 2003). Thus, although it is certain that intellectual performance is multidimensional (Carroll, 1993), the Full Scale IQ is by far the most useful measurement to consider in most situations in which an IQ test is administered.

The Full Scale IQ is one way to operationalize the theoretical construct of g. Originally g was so named for the general factor of intelligence. Some researchers prefer not to use the term "intelligence" because the term has acquired so many different meanings that scientific discourse is hampered by its use (Jensen, 1998). The earliest identified and most persuasive evidence in favor of g is the startling (and unexpected) observation that every single test of cognitive ability is positively correlated with every other test of cognitive ability so far identified. Psychologists have sought diligently for cognitive abilities that are unrelated to other cognitive abilities but have thus far failed. The fact that all tests of cognitive ability are positively correlated guarantees that factor analysis will extract a general factor that loads on all tests in the test battery. Depending on the nature of tests in the battery and the particular method of factor analysis used, other factors will emerge in a factor analysis as well (e.g., verbal, numerical, spatial, motor speed, perceptual speed, and phonological awareness). These smaller factors often have their uses in conjunction with g in narrow applications (e.g., prediction of musical ability, dyslexia, and typing speed) but rarely do these smaller factors of ability by themselves approach the predictive validity of g (Ree, Carretta, & Green, 2003). Despite the claims of some critics (e.g., Gould, 1981), the scientific foundation of g does not depend solely on the statistical procedure of factor analysis (Jensen, 1998).

The range of outcomes that IQ can predict with varying degrees of precision is very broad. For example IQ's correlation with tests of academic achievement is about .6 to .7 in elementary school, .5 to .6 in high school, .4 to .5 in college, and .3 to .4 in graduate school (Jensen, 1980, p. 319). IQ's correlation with grade point averages is about .1 to .2 lower than the correlations with academic achievement tests (Jensen, 1980, p. 320). Across all job types in the U.S. economy, the average correlation of IQ and supervisor ratings of job performance is about .3 to .5 (and the correlation is higher when job performance is measured objectively). Furthermore, IQ predicts performance better in complex occupations (r = .56) than simple ones (r = .23; Gottfredson, 1997). IQ correlates positively with occupational prestige, educational attainment, creativity, physical health, mental health, lifespan, and brain size and negatively with criminal status, poverty, chronic welfare dependence, unemployment, divorce, and single-parenthood (Herrnstein & Murray, 1994). The correlations for some of these outcomes is low enough that IQ has little accuracy for predicting outcomes of specific individuals and leave much variance unexplained but it should be noted that no other psychological trait has a predictive validity even close to that of IQ for such a broad array of outcomes (Gottfredson, 1997).

Some have speculated (hoped?) that IQ's predictive validity derives mainly from its ability to predict the low educational and occupational achievement of individuals with genetic abnormalities that cause mental retardation (e.g., Down's Syndrome)....