Human Capital Accumulation and Output Growth in Demand-led Macrodynamics

This paper sets forth two macrodynamic models of capacity utilization and output growth with human capital formation having a positive impact on labor productivity. Human capital formation is costly, however, and two financing mechanisms are considered, one in each model. In the first model, public investment in human capital is financed by some part of income tax revenues, configuring a further source of aggregate demand in addition to private consumption, government consumption, and private investment in physical capital. The second model features public investment in human capital formation financed by all income tax revenues supplemented by workers's own investment in human capital financed through debt. Hence public and private investment in human capital configure further sources of aggregate demand formation, together with private consumption and investment in physical capital. Analogously to firms’s desired investment in physical capital, workers’ desired investment in human capital is independent from saving out of current income. The excess of workers’s desired investment in human capital formation over the public investment in human capital is financed through debt made available by an endogenous supply of credit money. Although this second model is not intended to describe specifically debt-financed human capital formation through student loans, it incorporates some features of the U.S. experience with student debt such as a fixed interest rate and income-based repayment.