Working Paper: CEPR ID: DP14011
Authors: Moshe Hazan; Shay Tsur
Abstract: We analyze differences in labor productivity between Israel and a group of small OECD countries. We assume a more general human capital production function and calibrate it using PIAAC surveys, which examine the literacy and numeracy skills of the adult population in the OECD countries. Whereas Israel has more years of schooling, its population has lower measured skills. Using development accounting exercise, we show that once years of schooling and numeracy skills are taken into account, differences in accumulated factors explain more than three-quarters of the gap. This is against a split of 60-40 between accumulated factors and total factor productivity, when these skills are ignored. Additionally, using panel data on 13 OECD countries we show strong positive correlation between physical and human capital per worker at the industry level. A causal interpretation of our estimates implies that closing the gap in skills will indirectly close 18 percent of the gap in physical capital.
Keywords: development accounting; labor productivity; PIAAC; human capital; physical capital
JEL Codes: N/A
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| closing the skills gap (J24) | increase in physical capital per worker (E22) |
| increase in physical capital per worker (E22) | closing the gap in physical capital (E22) |
| increase in physical capital per worker (E22) | closing the gap in output per worker (O49) |
| years of schooling and numeracy skills (I21) | accumulated factors (D25) |
| accumulated factors (D25) | output per worker gap (J69) |
| TFP (F16) | output per worker gap (J69) |