Monday, March 17, 2014

How Cognitive Abilities Lead to Economic Growth

Most of us understand that knowledge and skills are important for economic development. What we may not understand is how this is measured across varying countries to determine if such growth is based in this human capital enhancement. A study by Hanushek & Woessmann (2012) found that cognitive skills play a causal relationship in economic growth. Their focus was based on averages of math and science scores from 1964-2003 in different countries. 

There are two primary ways to measure cognitive skills on a macro-economic level. Time in education focuses on the amount of years people went to school while cognitive skills focus on the actual skills that people learn. The later measurements are more difficult to obtain as each country measures these concepts differently and measurements cannot be easily compared.  

Skill is not simply an additive process but also a multiplier process. Basic skills lead to higher levels of skill development later. In other words, “skill begets skill through a multiplier process” (Cunha et. al. 2006, p. 698). The skills learned at different times of one’s life make their way into varying skill batteries as various opportunities rise to use those skills. The person can move to higher skill levels through past learning.

The general premise is that the right education and skills offers a better catalyst for economic growth than when these elements are not present. Human capital increases the stream of new ideas that produce a higher rate of technological development (Romer, 1990). That technological development raises market value and per capita production rates leading to higher organizational and national wealth. 

Previous studies have indicated that U.S. immigrants with high cognitive skills also earned more money (Hanushek and Kimko, 2000) when compared to those with low cognitive skills. These skills help to create greater skill development that can be used to generate wealth and improve per capita Gross Domestic Product (GDP). That GDP then makes its way into the Gross National Product (GNP) which is a marker of a countries growth. 

When skill and education align in the market it can have an enormous impact on development. According to Hanushek & Woessman (2011) improvements in these areas can raise GDP 6.2% for up to 80 years. Each worker becomes more productive and able to master the skills needed to take on new roles and positions within the economy thereby fostering economic flexibility.

The researchers found that cognitive abilities in endogenous growth models improve upon the innovative and adaptive abilities of a nation. As more people engage in the economic growth engine, and their personal development, the more growth expected. Growth can change through economic shifts expanding growth in some countries until a new homeostasis is found. Growth rates would then return to normal but at a higher income rate. 

Cunha, F.,et. al. (2006). Interpreting the evidence on life cycle skill formation. In E. A. Hanushek & F. Welch (Eds.), Handbook of the Economics of Education. (pp. 697–812). Amsterdam: Elsevier.

Hanushek, E. & Woessman, L. (2012). Do better schools lead to more growth? Cognitive skills, economic outcomes and causation. Journal of Economic Growth, 17 (4).

Hanushek, E. A., & Kimko, D. D. (2000). Schooling, labor force quality, and the growth of nations. American Economic Review, 90(5), 1184–1208.

Hanushek, E. A., & Woessmann, L. (2008). The role of cognitive skills in economic development. Journal of Economic Literature, 46(3), 607–668.

Hanushek, E. A., & Woessmann, L. (2011b). How much do educational outcomes matter in OECD countries?. Economic Policy, 26(67), 427–491.

Romer, P. (1990). Endogenous technological change. Journal of Political Economy 99(5), pt. II: S71–S102.

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