New evidence on the role of human capital in economic development

ABSTRACT

This study provides new evidence on the role of human capital in economic development by investigating the earnings and occupational attainment of immigrants in Venezuela. The results show that immigrants are representative of the source country’s population and are more likely to use their skills in the labour market of the host country. This allows us to measure the human capital endowments of the source countries more precisely. Using the standard development accounting framework to explain the variation in output, the study finds that physical capital and human capital account for 73–79% of income differences across countries.

KEYWORDS:

• Development accounting
• income differences
• human capital

JEL CLASSIFICATION:

• E24
• F22
• O15

Acknowledgements

Thanks to Professor Lutz Hendricks for his valuable comments. I am indebted to the anonymous referee who provided helpful comments and suggestions that substantially improved the paper. The Minnesota Population Center provided census data used in the analysis.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

¹ See Abdulla (2020) for more details about immigrants in low-income countries.

² The choice of the data used in the study is driven by data availability. The 1990 Venezuelan census is also available from the IPUMS (2017). We use the 1990 census to check if the age of migration affects our findings in section 3.1.

³ The sample of countries used in the analysis is provided in Table A2. The choice of the cut-off value of 50 observations is constrained by data availability. We acknowledge that increasing the cut-off would decrease the number of countries to be included in our analysis. We have also checked if the findings are affected by changing the cut-off of immigrant observations and found that the results don’t change. In the case of using a fewer number of observations (30 immigrants) a slightly more number of countries could be used but the general findings wouldn’t be affected.

⁴ The assumption that the skill price is the same for natives and immigrants (${\omega }^{native}={\omega }^{immigrant}={\omega }^n$) may seem too strong in countries where there is discrimination against foreign immigrants in the labour market. For example, in these countries domestic workers may receive a higher price for their skills relative to foreign immigrants with similar characteristics. We have checked if this is present in the labour market of Venezuela by testing the equality of returns to skills that are generated from the regressions estimated for natives and immigrants. The findings show that the returns are not statistically different.

⁵ Detailed information about regions is reported in Table A3 in the Appendix.

⁶ There is a potential bias that could arise if immigrants have migrated to Venezuela at an early age so that their human capital may be biased towards the human capital of the host country. Unfortunately, the data on age at immigration provided by the IPUMS are quite limited, being available only for the 1990 census and representing a categorical variable indicating years since immigration: less than 1 year, from 1 to 4 years, from 5 to 9 years, and 10 or more years. Based on these data, using mid-point values of the categorical variable we have constructed the variable age at migration. However, the constructed variable is imperfect as it may overstate or understate the respondent’ s age at migration. The 1990 census shows that 79% of immigrants arrived in Venezuela at the age of 20 or older. The findings change very little when restricting the sample of immigrants to those who arrived at older age.

⁷ The countries GDPs are for 2000 and obtained from Feenstra, Inklaar, and Timmer (2015). The sample of countries used in the analysis is provided in A2 in the Appendix.

⁸ The detailed occupation categories grouped by skill levels are given in Table A4.

⁹ We divide the source countries into three groups based on their income per capita: high, middle, and low income countries.

¹⁰ Professionals, technicians, associate professionals, legislators, senior officials and managers are defined as working in high-skill occupations.

¹¹ One possible source of the higher rate of immigrants in high-skill occupations may be related to the availability of country-specific skills. For example, the higher share of migrants in high-skill jobs than that of non-migrants in Brazil can be explained by the abundance of country-specific skills in Brazil and the scarcity thereof in Venezuela. Another explanation could be the impact of cultural and social factors on the transferability of skills (see Kostenko, Harris, and Zhao 2012).

¹² Overall, our results are also consistent with other studies suggesting that human capital is important in explaining income differences at the regional level (see Valero-Gil and Valero 2021; Hanushek, Ruhose, and Woessmann 2017; Abdulla 2021).

Additional information

Funding

The work was supported by the Nazarbayev University [Social Policy Grant].