Literacy and Growth

From the demographic profile of the 1994-1998 International Adult Literacy Survey, we derive synthetic time series over the 1960–1995 period on the literacy level of labor market entrants. This information is then used as a measure of investment in education in a two-way error correction panel data analysis of cross-country growth for a set of 14 OECD countries. The analysis indicates that direct measures of human capital based on literacy scores contain more information about the relative growth of countries than measures based on years of schooling. The results show that, overall, human capital indicators based on literacy scores have a positive and significant effect on the transitory growth path and on the long-run levels of GDP per capita and labor productivity. Quantitatively, our results indicate that the skills associated with one extra year of schooling increase aggregate labor productivity by approximately 7 %, which is consistent with microeconomic evidence (Psacharopoulos, 1994). Moreover, we find that investment in the human capital of women is more important for growth than investment in the human capital of men and that increasing the average literacy skills over all individuals has a greater effect on growth than increasing the percentage of individuals that achieve high levels of literacy skills.