Innovation, Technology Diffusion and Poverty Traps: The Role of Valuable Skills

This paper develops a new index of human capital that measures cognitive skills employed by the adult population in seventy nations during 1970-2003. The index is compared to existing measures of human capital in the Benhabib and Spiegel (2005) model. Analysis goes beyond the Cobb-Douglas production function. The evidence shows that (i) the new index best explains trends in technology growth; (ii) the skillseducation deficit has increased in Africa and advanced OECD countries; (iii) the number of countries in poverty traps has risen; and (iv) valuable skills impact most on innovation when physical capital and skills are complementary. The results suggest that public policy ought to pay more attention to the employability of skills.