King, Elizabeth M.Montenegro, Claudio E.Orazem, Peter F.2012-03-192012-03-192010-08-01https://hdl.handle.net/10986/3890According to T.W. Schultz, the returns to human capital are highest in economic environments experiencing unexpected price, productivity, and technology shocks that create "disequilibria." In such environments, the ability of firms and individuals to adapt their resource allocations to shocks becomes most valuable. In the case of negative shocks, government policies that mitigate the impact of the shock will also limit the returns to the skills of managing risk or adapting resources to changing market forces. In the case of positive shocks, government policies may restrict access to credit, labor, or financial markets in ways that limit reallocation of resources toward newly emerging profitable sectors. This paper tests the hypothesis that the returns to skills are highest in countries that allow individuals to respond to shocks. Using estimated returns to schooling and work experience from 122 household surveys in 86 developing countries, this paper demonstrates a strong positive correlation between the returns to human capital and economic freedom, an effect that is observed throughout the wage distribution. Economic freedom benefits those workers who have attained the most schooling as well as those who have accumulated the most work experience.CC BY 3.0 IGOALLOCATIONALLOCATION OF RESOURCESBANK POLICYCAPITAL FLOWCAPITAL FLOWSCAPITAL INVESTMENTCAPITAL INVESTMENTSCAPITAL MARKETSCAPITALISMCITIZENSCIVIL RIGHTSCOMPARATIVE ADVANTAGECOMPARATIVE ECONOMICSCOMPETITIVE MARKETSCONTRACT ENFORCEMENTCREDIT MARKETSCRISESDECENTRALIZATIONDECENTRALIZED DECISIONSDEMOCRACYDEMOCRATIC INSTITUTIONSDERIVED DEMANDDEVELOPING COUNTRIESDEVELOPING COUNTRYDEVELOPMENT BANKDEVELOPMENT ECONOMICSDICTATORSHIPDIMINISHING RETURNSDISCRIMINATIONDISEQUILIBRIUMDIVISION OF LABORDUMMY VARIABLEDUMMY VARIABLESECONOMETRICSECONOMIC ACTIVITYECONOMIC DECISIONSECONOMIC DEVELOPMENTECONOMIC EFFICIENCYECONOMIC FREEDOMECONOMIC GROWTHECONOMIC HISTORYECONOMIC OPPORTUNITYECONOMIC PERFORMANCEECONOMIC POLICIESECONOMIC RESEARCHECONOMIC RIGHTSECONOMIC SYSTEMSECONOMICSEDUCATED GROUPSELASTICITYEQUAL ACCESSEQUAL RIGHTSEQUILIBRIUM THEORYEQUILIBRIUM UNEMPLOYMENTEQUILIBRIUM WAGESEXPENDITURESFERTILITYFINANCIAL INSTITUTIONSFINANCIAL MARKETSFOREIGN DIRECT INVESTMENTFOREIGN INVESTMENTFUTURESGDPGDP DEFLATORGDP PER CAPITAGLOBAL DEVELOPMENTGLOBAL INEQUALITYGLOBAL MARKETSGLOBALIZATIONGOVERNMENT EXPENDITUREGOVERNMENT INVESTMENTGOVERNMENT POLICIESGOVERNMENT POLICYGOVERNMENT REGULATIONSGROSS DOMESTIC PRODUCTGROSS DOMESTIC PRODUCT PER CAPITAGROWTH RATEHEALTH CAREHOST COUNTRYHOUSEHOLD INCOMEHOUSEHOLD SURVEYSHUMAN CAPITALHUMAN DEVELOPMENTHUMAN RIGHTSINCOME GROWTHINCOME INEQUALITYINCOME LEVELSINCREASING RETURNSINDIVIDUAL DECISIONSINDIVIDUAL FREEDOMSINDIVIDUAL RIGHTSINDUSTRIAL REVOLUTIONINEFFICIENCYINFLATIONINFLATION RATESINFORMATION TECHNOLOGIESINNOVATIONINNOVATIONSINSTITUTIONAL ECONOMICSINSTRUMENTINSURANCEINTEREST RATEINTEREST RATESINTERGOVERNMENTAL TRANSFERSINTERNATIONAL BANKINTERNATIONAL CAPITALINTERNATIONAL COMMUNITYINTERNATIONAL MIGRATIONINTERNATIONAL TRADEINTERPOLATIONSINVESTINGINVESTMENT CLIMATEINVESTMENT DECISIONSJOB CREATIONLABOR DEMANDLABOR ECONOMICSLABOR FORCELABOR MARKETLABOR MARKET INDICATORSLABOR MARKET POLICIESLABOR MARKETSLABOR SUPPLYLIFE EXPECTANCYLIQUIDITYLIVING STANDARDSMACROECONOMIC GROWTHMARGINAL PRODUCTMARITAL STATUSMARKET INFORMATIONMARKET RETURNMARKET WAGEMERCHANTSMIGRATIONMINIMUM WAGESMINORITYMONETARY POLICYMONETARY STABILITYNEGATIVE SHOCKSNUMBER OF CHILDRENOCCUPATIONAL MOBILITYPARLIAMENTARY SEATSPARLIAMENTARY UNIONPER CAPITA INCOMESPERSONAL INCOMEPOLICY RESEARCHPOLICY RESEARCH WORKING PAPERPOLITICAL ECONOMYPOLITICAL INSTITUTIONSPOLITICAL PARTICIPATIONPOLITICAL POWERPOLITICAL RIGHTSPOLITICAL STABILITYPOLITICAL SYSTEMSPOPULATION SIZEPRICE CONTROLSPRIVATE ENTERPRISEPRIVATE OWNERSHIPPRODUCTIVITYPRODUCTIVITY GROWTHPROGRESSPROGRESSIVE TAXPROPERTY RIGHTSRATE OF GROWTHRATE OF RETURNRATE OF RETURNSRATES OF RETURNREAL GDPREAL GROSS DOMESTIC PRODUCTRENTSRESOURCE ALLOCATIONRESOURCE ALLOCATIONSRESPECTRETURNRETURNSRIGHTS OF WOMENRULE OF LAWRURAL AREASRURAL LABORRURAL MARKETSRURAL RESIDENCERURAL RESIDENTSSANITATIONSCHOOL QUALITYSEARCH COSTSSEGMENTS OF SOCIETYSKILLED WORKERSSOCIAL RETURNSSPECIALIZATIONSTATE UNIVERSITYTAXTAX RATESTAXATIONTECHNICAL ASSISTANCETRADINGTRANSACTIONTRANSACTION COSTSTRANSITION ECONOMIESTRANSITION ECONOMYTRANSPARENCYUNDUE INFLUENCEUNEMPLOYEDUNEMPLOYED WORKERUNEMPLOYED WORKERSUNEMPLOYMENTUNEMPLOYMENT RATEUNEMPLOYMENT RATESUNSKILLED LABORURBAN AREASURBAN WORKERSUSURY LAWSVALUE OF OUTPUTWAGE DISTRIBUTIONWAGE FLEXIBILITYWAGE STRUCTUREWAGESWOMEN IN PARLIAMENTWORK EXPERIENCEWORKFORCEWORKING POPULATIONWorld Bank10.1596/1813-9450-5405