Long-Run Growth Effect of the Physical Capital-Human Capital Complementarity: An Approach by Time Series Techniques

---

 

 

 

 

Long-Run Growth Effect of the Physical Capital-Human Capital 

Complementarity: An Approach by Time Series Techniques 

 

 

 

Nejat ERK 

Çukurova Üniversitesi, İktisat Bölümü, P.K. 393, 01330, Adana-TÜRKİYE 

[e-mail]

 

 

 

Sanlı ATEŞ 

Çukurova Üniversitesi, İktisat Bölümü, P.K. 393, 01330, Adana-TÜRKİYE 

[e-mail]

 

 

 

 

 

 

 

 

Uluslararası ODTÜ Ekonomi Kongresi III 

8-11 Eylül 1999 

Ankara 

 

METU International Conference in Economics III 

September 8-11, 1999 

Ankara 

 

 

 

 

 

---

Long-Run Growth Effect of the Physical Capital-Human Capital 

Complementarity: An Approach by Time Series Techniques 

 

Nejat ERK

 

Çukurova University, Department of Economics, 01330 , Adana, Türkiye. E-mail: [e-mail]

 

 

Sanlı ATEŞ

 

Çukurova University,Department of Economics, 01330, Adana, Türkiye.E-mail: [e-mail]

 

 

Abstract 

 

This paper aims to explore physical capital (K) and human capital (H) complementarity 

impact on long-run economic growth. It is hypothesized that in times of frequent innovations 

factor complementarity plays a more significant role in explaining GDP growth than factor 

substitutability adopted among neoclassical and endogenous growth models. VAR results 

confirm that physical capital and human capital accord showing complementarity is a good proxy 

in explaining GDP growth for selected developed countries. The estimates yield results showing 

very short term and stabilizing impacts on innovation for all tested countries. 

 

 

 

 

 

1. Introduction 

 

Economic growth theory had faced significant changes during the last fifty years. This in 

no way decreases the importance of different long term economic growth rates both for 

developed and developing countries. In fact, major economic literature concentrates on whether 

future growth rates will lead to a convergence or divergence of Per capita income which is an 

extension of “catch-up thesis” (Baumol, 1986; Barro, 1994; Jones, 1997). Besides these debates, 

consistency of low long-run growth rates of developed countries relative to developing countries 

needs to be explored to create rationale for the divergence or convergence of Per capita income 

among countries. Introduction of human capital factor to economic growth theory is not new. But 

as in the case of Ak type models, human capital has been added to the production, economic 

growth and to the Hamiltonian functions with the assumption that this independent factor does 

not need any concentration with other factors of production. To clarify the concentration of K/H 

(physical capital stock/human capital stock) concept, we should look into factors like 

technological absorption, diffusion, managerial applications, learning by doing and other 

endogenous factors, not reflected in traditional Ak type models. Existing technological level and 

improvements in it, needs similar improvements in human capital component in its broadest 

sense to stir up long term economic growth in all countries. Developed countries with 

---

 

 

2 

devastating technological improvements had not been able to capture high growth rates because 

of the relative inadequacy of human capital endowments. Thus, not the absolute sizes of K and H 

but their relative concentration values should be the key determinant of long term economic 

growth. We start with the historical developments in economic growth theory for the last 

decades. In the empirical section, to test  our hypothesis, that for a given time interval higher K/H 

values will be represented by low growth rates which coincides with high per capita income 

countries will be tested using tests of VAR technique (Sims, 1980; Enders, 1995).   

The debate over complementarity and substitutability of inputs of output is not new.  But 

in recent years economics of complementarity has been major area of research interest  

(Matsuyama,  1996; Young, 1993; Teulings, 1999). Thus, the economic history of economic 

growth, looks at the nature of inputs to be used, as well as the mathematical functional form in 

explaining GDP growth.  In this respect, it is possible to categorize debates around 

complementarity of labor ( human capital ) and physical capital under three alternative 

approaches.  One group of thought looks at widening Wage

skilled

 and Wage 

unskilled 

differences and 

argues that aggregate technology is capital-skill complementary (Krusell et all, 1997; Goldin and 

Katz, 1996). 

Second 

approach looks at physical and human capital complimentarity within the 

scope of "creative destruction" (Matsuyama, 1999; Young, 1993 ). And the last approach looks at 

technological innovations and its impact on the complementarity of input requirements 

(Bresnahan et al., 1999) 

 

Economist interest in skilled and unskilled wage dispersion and its outcomes could be 

explained by capital-skilled complimentarity. Growth's in stock of equipment, reflecting as 

higher technological levels increases the MPP

L 

of skilled labor while lowering the MPP

L

 

unskilled labor. As an outcome, almost in all economies we see that increased wage inequality 

can be a consequence of capital-skill complimentarity. ( Krussel et al., 1997). Similar findings 

have been put forward by Twellings (1999). Investment in human capital in terms of training 

increases the skill level by an equal amount increase in relative wage gain, equal to loss of less 

skilled, expressed as complexity parameter. Along the same lines, physical capital and more 

advanced technology should be regarded as relative compliment of human capital (Goldwin and 

Katz, 1997). When cost reduction in an industry reflect productivity increases, we see that key 

determinant is employee involvement programs which could also be interpreted as another way 

of investment in human capital (Helper, 1997). The author argues that, unit cost of a product is 

not a function of quantity produced but mainly by the amount of commitment and skill 

improvements. 

---