Working Paper Series: Special Edition of 2016 to 2018 Interns

3.3 Mincerian Human Capital Specification One area of uncertainty has always been how to account for differences between macro and micro level results in economics. In this case, how do we reconcile the effect of schooling at the macro level with what is manifesting at the micro level. Loening (2005) points out that macro returns could be higher due to externalities that accrue from education. Occurrences such as technological progress, reduction in crime, improved health care that come about as a result of investments in education do not appear in private returns to education. Schultz (1988) defines the private rate of return as the internal rate that equalises the present discounted private opportunity and the direct cost of schooling with the discounted value of the private after-tax gains. Griffith (2001: 157) simplifies it as “the net benefits accrued to an individual for having foregone income to attain education and any direct costs of education”. Following Cohen and Soto (2001), an attempt is made to reconcile macro and micro level returns in St Vincent and the Grenadines using Equation (13): " = " ∙ c ∙ (%$c) " " where Y is output, A total factor productivity, K physical capital, and HM human capital. In applying Mincer’s 1974, Bils and Klenow (2000) made the conclusion that micro evidence derived from a log-linear version could be used to specify the aggregate human capital stock: measures the returns to education. 7 The original Mincer (1974) equation shows the relationship of wage income with their educational attainment level at the individual or worker level, i.e. the rate of return to education or schooling. Bils and Klenow’s (2000) adaptation of this approach allows for the incorporation of human capital. As with the construction of the earlier error-correction model, a logarithmic expression is derived from the production function: (13) (14) " = ~∙h 6 ∙ " ⟺ ℎ " = ~∙h 6 ℎ " is the human capital per worker, where ℎ " is average years of schooling and

log " = log " + ∙ log " + (1 − ) ∙ ∙ ℎ "

(15)

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