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Human Capital, External Effects and Technical Change

This paper formulates a positive association between total factor productivity and external effects of human capital. It interprets that exogenous technical changes - as a result from the removal of barriers for trade and technology diffusion and other policy or institutional reforms - enhance the external effects of human capital. In a variant of Lucas' (1988) model with exogenous productivity growth, it is shown that higher external effects would mean higher wage and growth rates. An empirical illustration using inter-industry wage premium reveals some significant evidence in favour of the hypotheses of external effects of human capital and, above all, of enhanced external effects when there are positive technical changes. The paper contributes to the understanding of both macro and micro aspects of external effects, particularly in regard to the roles of human capital in augmenting the benefits of technological diffusion, namely in terms of productivity growth.