Cross-Country Analysis of Composition of Human Capital and Total Factor Productivity Growth depending on its Distance to Frontier

This paper empirically examines human capital's contribution to economy-wide technological progress and also on technical efficiency gain depending on its distance to frontier in a panel of 75 countries over the period 1970 - 2010. This study illustrates that only advanced economies rely on technological change while dependence on technical efficiency gain is high for middle and poor income countries. Using stochastic frontier analysis and system generalized method of moments (GMM), it is shown that skilled human capital is important for technical efficiency gain for rich income countries whereas middle and poor income countries rely on semi-skilled human capital for technical efficiency gain. This study also analyzes the impact of skilled-unskilled human capital on total factor productivity growth for both aggregate and multiple outputs. For aggregate output, the production function has been estimated with fixed effect panel regression. It shows that elasticity of capital is higher for rich income countries than middle or poor income countries whereas ranking of coefficient associated with labor is reverse. After that, the total factor productivity would be estimated by Solow residual. In the second stage, using system GMM, it is shown that skilled human capital is important for total factor productivity growth for rich and middle income countries and unskilled human capital is growth enhancing for poor income countries. For multiple outputs, the production function has been estimated by data envelopment analysis. In the second stage by using system GMM, same findings would be revealed as in the aggregate output for total factor productivity growth.