Chapter 8

Human Capital:
Education and
Health in
Economic
Development

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Development & Human Capital

• Health and education are investments in

human capital to improve labor productivity

• Investment in human capital is a major

determinant of growth and development

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Development & Human Capital

• Investment in health increases the return to

investment in education

• Investment in education increases the return

to investment in health

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Development & Human Capital

• Economic growth would not lead to substantial

increases in investment in children’s education
and health

• Better educated mothers tend to have educated

and healthy children

• Market failure in education and health requires

policy action

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Determinants of Education Demand

• Wage or income differential paid to workers

with various levels of education

• Probability of success in finding a job in the

formal sector

• Direct private cost of education (e.g., tuition)

• Indirect or opportunity cost of education (i.e.,

foregone income)
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Return of Investment in Education

• Initial investments in education lead to a

stream of higher future income

• The present discounted value of this stream

of future income is compared to the cost of
education

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The Economics of Education

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Age-earnings Profiles by Level of
Education: Venezuela, 1989

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Child Labor in LDCs

• Some 120 million children work full-time

• Some 150 million children work part-time

• Of these 250 million working children

– 61% or 153 million in Asia
– 32% or 80 million in Africa
– 7% or 17 million in Latin America

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Child Labor in LDCs

• Child labor is a common practice in LDCs

labor markets

• The problem may be modeled using the

“multiple equilibria” approach

• Government intervention is needed to move

to a ‘better’ equilibrium

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Market for Child Labor

Adult Labor Supply Adult & Child Labor Supply

A T
Wage • At WE1 labor supply is AA’
• As children enter the market, wage falls
• At WL adult and child labor supply is TT’
WE1 E1 • At WE2, OA’ of adult and A’T’ children
WH are employed; a ban on child labor
B moves E2 to E1
WL C
• The S-shaped curve is supply of child
WE2 E2 labor between these wages: E1BCE2

A’ T’ Demand for Labor

Employment

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The Education Gender Gap

Females receive less education than males in LDCs. To close the gap

• The rate of return on education is higher for female than male

• Female education increases productivity and lowers fertility

• Educated mothers raise educated children

• Female education helps break the vicious cycle of poverty and

inadequate schooling for women

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Male and Female Education
Rates, 2004

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The Education Gender Gap

Consequences of gender bias in health and

education

• Economic incentives

• Cultural setting

• Increase in family income does not always

lead to better health and education
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Social vs. Private Returns of Education

• Social and private returns of education are

higher in LDCs than MDCs

• Private returns are higher than social returns

• Social and private returns are higher for

primary than secondary and higher
education

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Rate of Return to Investment in
Education

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Optimal Level of Education

• Optimality criterion for education: maximum

difference between returns and costs

• Social: the optimal level of education is “primary”

where costs are subsidized and returns are high

• Private: the optimal level of education is “higher”

where costs are heavily subsidized and returns are
very high

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Social Costs & Returns

Costs/Returns Social Returns

Social Costs
Tertiary

Secondary
Primary
Public decision: Invest in primary education

Years of schooling completed

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Private Costs & Returns

Private Returns
Costs/Returns

Tertiary Private Costs

Secondary
Primary

Private decision: Invest in higher education

Years of schooling completed

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Education and Development

• Distribution of education
– Lorenz curves for the distribution of education

• Education Inequality and Poverty

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Lorenz Curves for Education
in India and South Korea, 1990

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Gini Coefficients for Education in
85 Countries, 1990

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Health-Care and Development

Measurement and distribution

• Life expectancy at birth

• Child mortality
• Malnutrition and hunger

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Life Expectancy in World Regions

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Under-5 Mortality Rates in Various
World Regions

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Proportion of Children under 5 Who Are
Underweight, 1990 and 2005

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Deaths of Children under Age 5

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Children’s Likelihood to Die in LDCs

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Regional HIV and AIDS Statistics,
2006

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Health-care and Development

• Disease burden
• HIV/AIDS infection
• Malaria
• Parasitic Worms and Other “Neglected
Tropical Diseases”

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The Major Neglected Tropical Diseases,
Ranked by Prevalence

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Health Systems and
Development
• Health and Productivity
– Is there a connection?

• Health Systems Policy

– Great variability in the performance of health
systems at each income level

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GNI per Capita and Life
Expectancy at Birth, 2002

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