We all know that developing countries lag far behind developed ones, and that the usual factors of production are not sufficient to explain this difference. Hence the emphasis in policy circles on "institutions" and other vaporous concepts. Incentives for the accumulation of capital mysteriously do not seem to work either, as first highlighted by Lucas. What about incentives for accumulation of human capital?
David Lagakos, Benjamin Moll, Tommaso Porzio and Nancy Qian do not quite address human capital as in education, but rather experience. They document with micro-data from 36 countries that returns to experience are high in developed economies, but essentially flat in developing ones. With a growth accounting exercise, they then show that this difference accounts for a third of the remaining gap after having factored in human and physical capital differences. The question is then, why is experience not rewarded in developing economies? The classical explanation of why seniority pays revolves around job-worker match quality that improves over time, job-specific human capital accumulation, and the nature of dynamic job contracts. Why would this not apply? The authors this this is because total factor productivity and experience accumulation are complements. Some literature points out this may be true: Andrés Erosa, Tatyana Koreshkova and Diego Restuccia and Rodolfo Manuelli and Anand Sheshadri.