Complementarities and Cross-Country Gaps: Education, Technology, and Income
Abstract: In this paper we explore the ability of models of human capital accumulation and technology adoption to explain the observed disparities in the education-attainment and income gaps of countries. We explore the role of two different forms of complementarities. First, we consider models with a complementarity across the human capital of workers performing different production tasks inside a firm. Second, we consider models in which the net return to technology adoption depends on the human capital of the agents running the firms. We argue that in those models, barriers to the accumulation of human capital in the low end distribution of income and skills leads to diminished investment in skills in the high end of the distribution. Likewise, a low investment in education and skills by the high-skilled workers and managers leads to diminished investment in R&D (innovation and technology adoption), and can also depress the investment in human capital by workers in the lower ranks of firms. In the lens of our model, the increase in the supply of lower level skills will not translate into higher productivity unless there is also a higher supply of high skilled workers that complements them. These findings imply that two countries that have labor forces that are similar in terms of average schooling years, but a different composition of education levels, can have significantly different outcomes in terms of technology adoption, productivity, and output. As technology adoption activities and human capital investments reinforce each other, initial differences might be amplified over time as countries with similar initial conditions follow different development paths. We exploit these feature, analyzing quantitatively how differences in initial endowments, education policies, and education costs across countries lead to differences in output, productivity, and sectoral composition.