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Talent, Labor Quality, and Economic Development

We develop a theory of labor quality based on (i) the division of the labor force between unskilled and skilled workers and (ii) investments in skilled workers. In our theory, countries differ in two key dimensions: talent and total factor productivity (TFP). We measure talent using the observed achievement levels from the Programme for International Student Assessment (PISA) scores. Our findings imply that the quality of labor in rich countries is about twice as large as the quality in poor countries. Thus, the implied disparities in TFP levels are smaller relative to the standard growth model using a measure of labor quality based on Mincer returns. In our model, the resulting elasticity of output per worker with respect to TFP is about 2.

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