Human Capital / The quality of labor in rich countries would be about twice as large as the quality in poor countries research finds

“It is well known by now that the observed cross-country differences in output per worker are large. For example, the richest countries in the world economy are about 30 to 40 times richer than their poorest counterparts” write German Cubas, B. Ravikumar, and Gustavo Ventura Talent, Labor Quality, and Economic Development  on research.stlouisfed.org (adapted quotes to follow).

The authors develop a theory of labor quality based on (i) the division of the labor force between unskilled and skilled workers and (ii) investments in skilled workers. In their theory, countries differ in two key dimensions: talent and total factor productivity (TFP). The authors measure talent using the observed achievement levels from the Programme for International Student Assessment (PISA) scores. Their findings imply that the quality of labor in rich countries is about twice as large as the quality in poor countries.

The authors find substantially larger differences in labor quality across countries than standard analyses based on Mincerian returns. Using Mincerian returns, labor quality in the poorest 10 percent of the countries in their sample is about 86 percent of the quality in the richest 10 percent of the countries. In their model, this labor-quality ratio is only about 45 to 55 percent. In the calculation of the Mincerian labor quality, workers in different countries with the same years of schooling are considered to be of the same quality. In contrast, their model treats them differently based on the distribution of the PISA score for the country. For instance, the average PISA score among workers with high school education or less in the U.S. is nearly 33 percent higher than that in the Krygyz Republic – the country with the lowest mean PISA score and lowest output per worker in their sample. In addition, the investment in skilled workers in their model increases the quality of the average U.S. skilled worker even more. Their finding on labor quality differences is similar to that in Schoellman (2011), who also treats workers in different countries with the same years of schooling differently and uses data on immigrants in the U.S. to infer variation in labor quality. He concludes that labor quality differences between poor and rich countries are twice as large as those under conventional measures using Mincer returns.

As a result of the larger implied differences in labor quality, TFP differences from their model are smaller than those from standard analyses. Stated differently, output per worker in their model reacts more to changes in TFP. The resulting elasticity of output per worker with respect to TFP is around 2.1 in their model. The TFP elasticity is 1.5 in the standard one-sector growth model and roughly 1.7 under a measure of labor quality based on Mincer returns, as this variable is correlated with output per worker.

Chosen excerpts by Job Market Monitor. Read the whole story at 

 Source: Talent, Labor Quality, and Economic Development