Productivity and Human Capital: The Case of Ethiopia

Abstract

The general aim of the United Nation Millennium program is to reduce poverty in poor countries by half in 2015. This can be achieved through economic growth or redistribution or both. While redistribution without growth is win-lose, growth lead poverty reduction is a win-win to different members of a society. This thesis investigates the relationship between productivity, one of the main source of economic growth other than factor accumulation, and human capital. They have some ambiguous relationship. Some found a positive and others found negative effect of human capital on productivity. Here in this thesis, I tried to see the effect of human capital on productivity. I do that in two ways. First by taking human capital as a facilitator of the adaption of new technologies rather than taking it as a separate input (Nelson-Phelps Hypothesis). Second, I tested the direct effect of it by taking it as a separate input. The data I use to test this fact focuses on Ethiopia. I use health and education spending as a proxy of human capital of the country. The result will help guide the country’s economy policy aimed at promoting growth and save people from misery due to poor economic performance. I found that human capital has a positive influence on facilitating the adaption of new technologies. I found this result by testing the Nelson-Phelps Hypothesis. When I took human capital as a separate input, still it has a positive and significant effect on productivity. The elasticity of human productivity with respect to human capital is approximately 2 suggesting the presence of human capital externalities. Surprisingly, I found a negative influence from physical capital. This need further study.