A New Index of Human Capital to Predict Economic Growth

Abstract: The accumulation of knowledge required to produce economic value is a process that often relates to nations economic growth. Such a relationship, however, is misleading when the proxy of such accumulation is the average years of education. In this paper, we show that the predictive power of this proxy started to dwindle in 1990 when nations schooling began to homogenized. We propose a metric of human capital that is less sensitive than average years of education and remains as a significant predictor of economic growth when tested with both cross-section data and panel data. We argue that future research on economic growth will discard educational variables based on quantity as predictor given the thresholds that these variables are reaching.