Quality of work experience and economic development—estimates from Canadian immigrant data

This paper presents a methodology to analyze the effects of human capital quality on economic development.  In a first step, we show how we can use GDP per capita as a cross-country proxy for the quality of schooling and work experience in otherwise Mincerian immigrant earnings regressions.  The approach is appealing for a number of reasons.  One reason is that we should expect GDP per capita to be a good indicator of human capital quality because rich countries generally spend more monies on schools, teachers and the like, and also provide better on-the-job learning opportunities (as they are, among other things, more technologically advanced) than poor countries.   Another reason is that while cognitive test scores are available for quite a limited number of countries for cross-country comparison purposes, data on GDP are available for most countries in the world and for long periods of time.  Finally, whereas it would not be possible to use GDP as a proxy for the quality of schooling in a cross-country growth study because of an obvious endogeneity issue, GDP per capita is a strictly exogenous variable in an empirical analysis of immigrant earnings.  What immigrants bring with them when they move to another country is their human capital—the other factors that determine GDP in the country of birth are left behind.

            In a second step, we estimate our earnings regression using data on GDP per capita from the Heston, Summers and Aten’s (2009) Penn World Tables and data on Canadian immigrant earnings, human capital and other characteristics from the Statistics Canada 2006 Census Microdata Masterfile. 

            In a third step, we translate the estimated returns to quality-adjusted schooling and quality-adjusted work experience into aggregate effects in a cross-country growth accounting framework.  We find that combining the quality adjustments for both schooling and work experience leads to human capital quality adjustments that are in between those previously found in the literature.  Perhaps more importantly though, we find that, quantitatively speaking, the quality of work experience plays a much bigger role in explaining differences in output per worker than the quality of schooling.  This suggests that the effects of improving the quality and the quantity of schooling in less-developed countries might be rather limited if labour-market institutions and ways of doing things are not changed at the same time to improve the quality of work experience. Our results thus introduce the notion that, ideally, from a human capital point of view, an economic development process should be balanced:  it should be characterized by simultaneous improvements in both schooling and labour market experience.