Human Capital Investment in China

When economists first began to measure the sources of economic growth, what previously had been considered an unexplained residual was shown to be attributable to human capital.
Examples of the growth of American economy, and that of many countries around the world, have shown that it has become recongized that human capital--the skill of the population-- plays a major role in explaining diferences in productivity and inequality among nations. Human capital is another, very valuable, kind of capital. It is costly to acquire, like physical capital, and pays off over time, like physical capital.

As China enters world markets, it has access to newer forms of technology and organizational arrangements. The need for a more skilled workforce will increase. By developed world standards, China's percentage of college- educated workers is low.The new technology being brought into China by its investment in physical capital requires more skilled workers to operate it. However, the fact is that unskilled workers migrating into industrial areas require skilled workers to train and complement them.

Capital and skill are complementary, since each factor raises the productivity of the other. The current investment strategy of China emphasizes physical capital over human capital, which fails to capture the benefits that arise from a more balanced investment strategy and leads to inefficiency.

So far, I am not suggesting that China should equalize the proportions of human and physical capital investment. For the return of the two are not equal-- relating market wages and the level of schooling-- economists found out that in China the return of physical capital is about 4 times higher than the return of human capital, and in developed countries the returns are more likely about the same (in equilibium).

One way to change the situation is to change the wage-setting policy in China, and this is what the government is doing now.