The Role of Saving in Economic Growth When the Cost of New Human Capital Depends on the Cost of Labor: Technical Paper 2004-04

Working Paper
February 2, 2004

Mark Lasky

Mankiw, Romer and Weil (1992) found that modifying the Solow growth model to include human capital substantially increases the impact on output of a change in the saving rate for physical capital because increased output induces greater investment in human capital. However, that conclusion rests on the assumption that the cost of new human capital is proportional to the price of output. If, instead, the cost of new human capital is proportional to the cost of labor, and thus proportional to labor productivity, the effect on output of a change in the saving rate for physical capital is the same as in the Solow growth model.