The New Stylized Facts of Economic Growth
As mentioned in chapter 3, in 1961, Nicholas Kaldor highlighted six stylized facts to summarize the patterns that economists had discovered in national income accounts and to check the growth models being developed to explain them.
Jones and Romer [2010] attempted to redo this exercise to investigate how much progress has been made. They came up with additional stylized facts that a satisfactory growth model should account for. Their list of additional stylized facts is as follows:1. Increases in the extent of the market. Increased flows of goods, ideas, finance, and people, via globalization, as well as urbanization, have increased the extent of the market for all workers and consumers.
2. Accelerating growth. For thousands of years, growth in both population and per capita GDP has accelerated, rising from virtually zero to the relatively rapid rates observed in the past century.
3. Variation in growth rates. The variation in the growth rate of per capita GDP increases with the distance from the technology frontier.
4. Large income and total factor productivity differences. Differences in measured inputs explain less than half of the enormous cross-country differences in per capita GDP.
5. Increases in human capital per worker. Human capital per worker is rising dramatically throughout the world.
6. Long-run stability of relative wages. The rising quantity of human capital, relative to unskilled labor, has not been matched by a sustained decline in its relative price.
Whereas Kaldor’s original facts were accounted for almost entirely using the neoclassical growth model, the facts highlighted by Jones and Romer reveal the broader reach of modern growth theory. To capture these facts, a growth model must consider the interaction between ideas, institutions, population, and human capital.
Two of the major facts of growth—its acceleration over the very long run and the extraordinary rise in the extent of the market associated with globalization—are readily understood as reflecting the defining characteristic of ideas: their nonrivalry.
The next two major facts—the enormous income and total factor productivity differences across countries and the stunning variation in growth rates for countries far behind the technology frontier—testify to the importance of institutions and institutional change.
The final two facts of Jones and Romer parallel two of Kaldor’s original observations, but Kaldor’s emphasis was on physical capital, whereas the emphasis in modern growth theory is on human capital. Human capital per worker is rising rapidly, and this occurs despite no systematic trend in the wage premium associated with education.
According to Jones and Romer, these facts also reveal important complementarities among the key endogenous variables. The virtuous circle between population and ideas accounts for the acceleration of growth. Institutions may have their most important effects on cross-country income differences by hindering the adoption and utilization of ideas from throughout the world. Institutions like public education and the university system are surely important for understanding the growth in human capital. And institutions are themselves based on ideas—inventions that shape the allocation of resources—and the search for better institutions is unending. Finally, the rising extent of the market, which raises the return to ideas and to the human capital that is a fundamental input to the production of ideas, may help explain why the college wage premium has not fallen systematically, despite the huge increases in the ratio of college graduates to high school graduates.
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