Mankiw, Romer and Weil's (MRW) recent augmented version of the Solow growth model considers a broader measure of the capital stock that includes both human and physical capital, in which both are augmented by investment of a fraction of GDP. For physical capital this is the savings rate, while for human capital it is essentially a linear function of the rate of secondary school enrolment, and both capital types enter the production function with the same weight. In Discussion Paper No. 780, Programme Director Daniel Cohen criticizes this extension of the Solow model in two respects. First, the assumption that the fractions of GDP invested in the two capital types are fixed reduces growth to a one-dimensional function of per capita income. Cohen estimates separate equations for the two types of capital accumulation to show that growth may be viewed as the sum of the Solow-type transitional dynamics and a `productivity wedge' amounting to a knowledge/GDP ratio. Where raising output requires accumulation of physical and human capital, this wedge exerts a significant effect on growth. For two countries with identical income levels and rates of school enrolment and savings, the one with a greater relative endowment of human vis-à-vis physical capital will therefore grow faster.

Second, Cohen disputes MRW's use of school enrolment as a proxy for other determinants of human capital accumulation since it may be a causal determinant of growth in its own right. Estimating a simple growth equation with an additional, idiosyncratic term to control for cross-country differences, he finds that the coefficient on school enrolment displays the wrong sign, while dropping school enrolment and retaining the idiosyncratic term yields an equation that accords with the augmented Solow model. Cohen concludes that capital accumulation has little external effect on the total productivity of the factors of production, which confirms MRW's view that physical capital enters the production function with the weight assigned by the Solow model. But it leaves open the modelling of human capital accumulation and in particular calls into question the causal role of school enrolment.

Two Notes on Economic Growth and the Solow Model
Daniel Cohen

Discussion Paper No. 780, June 1993 (IM)