October 08, 2025

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• Publication
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• Macroeconomy

Working Paper 2025-11

Abstract: We revisit the role of human capital in cross-country income differences. We develop a general equilibrium model where workers of different skill groups sort into occupations by comparative advantage. Wages and employment depend on workers' skill quality, occupation-specific country-embedded productivity, and occupational distortions. Using harmonized microdata for 50 countries, we infer these components from the model's equilibrium conditions. Workers in rich countries exhibit higher skill quality and substantially greater productivity, especially in white-collar occupations. Human capital explains 52 percent of output-per-worker gaps, largely through the complementarity between skill composition and quality, and further amplified by technology choices biased toward skilled labor. Adopting the US distribution of skill groups yields limited gains for poor countries without higher quality. Occupational distortions are more severe in low-income countries, reducing white-collar employment and raising wage premia, but with modest aggregate effects.

JEL classification: O47, O15, J24, J31, E24

Key words: human capital, development accounting, occupational sorting, country-embedded productivity, wage premia

https://doi.org/10.29338/wp2025-11

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Charles Gottlieb is with the University of Geneva and Aix-Marseille School of Economics. Jan Grobovsek is with the University of Ljubljana and University of Edinburgh. Alexander Monge-Naranjo is with the Federal Reserve Bank of Atlanta, Emory University, and CEPR.

The authors benefited from the comments and suggestions of Zsófia Bárány, Hannes Malmberg, Michael Peters, Tommaso Porzio, Todd Schoellman and numerous seminar participants at Freie Universität Berlin, Universität Bonn, Royal Holloway, Universitá di Bologna, NYU Abu Dhabi, CERGE-EI, University of Edinburgh, University of Groningen, Aix-Marseille School of Economics, University of Glasgow, University of Ljubljana, the SED Meeting in Cartagena, the European Winter Meeting of the Econometric Society in Manchester, the Swiss Macro Workshop, the Midwest Macro Conference in Richmond, the Econometric Society Africa Meeting in Abidjan, the STEG Annual Conference in Oxford, the Armenia Economic Association Meeting in Yerevan, and the Barcelona School of Economics Summer Forum. Monge- Naranjo gratefully acknowledges financial support from a Research Council Grant of the European University Institute. Jan Grobovsek acknowledges the financial support from the Slovenian Research and Innovation Agency (ARIS), research core funding No. P5-0128. The views expressed here are those of the authors and do not necessarily reflect the opinion of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Federal Reserve Bank of Atlanta working papers, including revised versions, are available on the Atlanta Fed's website at www.atlantafed.org. Click "Publications" and then "Working Papers. To receive e-mail notifications about new papers, go to subscribe.