As usual onFridays, from Raj Nallari and Breda Griffith's lecture notes.
Theoretical considerations of gender inequality and economic growth (3)
Endogenous growth theory in particular provides a framework for analyzing the effects of gender inequalities on economic growth. Endogenous growth theory arose from a seminal paper by Romer (1986) that challenged the main assumption of the neo-classical growth model, i.e. the law of diminishing returns. Because of diminishing returns to a factor, the per capita growth rate was zero. Furthermore, the law of diminishing returns also implied that poor countries grew faster than rich countries and economies grew faster the farther they were from their steady state. Romer used the 1982 Summers and Heston data set to show that a regression of the growth rate of 114 countries on their initial level of income gave a positive coefficient. This finding was in stark contrast with the neo-classical model that suggested that a regression of the growth rate on the initial level of income would give a negative coefficient. Romer’s conclusion was that the neo-classical model did not fit the data and, furthermore that it was intellectually unsatisfactory. In contrast, endogenous growth theory that assumes constant returns to a factor, finds no automatic relationship between how poor an economy is and how rich it can grow. Disparity between countries is allowed to persist and does not disappear as suggested by the neo-classical growth model.
Among the many reasons advanced by endogenous growth theory for why disparity might continue revolved around the concept of labor. Critics questioned the absence of the labor factor in the basic endogenous growth equation (Y=AK). In answer, a seminal paper by Lucas (1988) introduced the concept of “productive labor”. Lucas argued that there is no such thing as ‘raw’ labor and that all labor is productive by virtue of investment – the prime component of which is education and training. Lucas suggested that human capital should replace the labor factor. Using this interpretation, K represents a much broader concept of capital that includes both physical and human capital. The only way to get constant returns to a factor when all that exists is K, is a linear function, Y=AK. Economic growth is now constrained by investment in K. Savings are the key determinant of growth and now include savings/investment in labor through efforts in education. Thus savings is now understood to represent an aggregate savings that includes all kinds of capital, both human and physical.
Walters (1995) referenced in Stotsky (2006) considers four such ways in which gender can enter (endogenous) growth theory based on the human capital concept as presented by Lucas (1988). Walters (1995) notes that the human capital element central to endogenous growth theory:
- opens the way for time to be incorporated into the production of labor inputs;
- recognizes education and other influences on human capital accumulation and their relationship to growth;
- allows for the possibility of trade-offs between government fiscal policies, including spending programs, and growth; and;
- introduces scope for income distribution via its affect on human capital investment to influence growth.
Other writers have focused on the changes in fertility that have been shown to have long-run effects on growth in endogenous growth theory. Galor and Weil (1999) incorporate fertility and its link to economic growth in their theoretical model that involves the households decision on fertility and labor supply within an economic growth model where wages are endogenously determined. “Increases in capital per worker raise women’s relative wages which reduces fertility, and thus raises further capital per worker. This virtuous cycle leads to a rapid transition to lower fertility and higher output growth. Lagerlof (2003) also employs a modified version of this framework to model European economic development and fertility over the past millennium.