Human capital and endogenous growth in a large scale life cycle model

Most models of economic growth are infinite horizon models that neglect the role of human capital in shaping life-cycle variables. This paper introduces training decisions in a life-cycle model to study the role of human capital both in life-cycle behavior and as an engine of growth. The crucial assumption about growth of this model is that new generations are endowed with the average level of skills available when they were born. The paper studies the impact of demographics and taxation on the endogenous rate of growth. Population growth affects the age distribution of the population and the equilibrium spillover that sustains growth. Unlike what happens with infinite horizon models, this model shows per capita income growth and population growth to be inversely related. Also, different from fertility-based models, this model shows the direction of causality to go from exogenous population growth to endogenous growth. To forgo consumption, households hold human and physical capital. Tax policy can affect the proportion of these assets in household portfolios. Tax policy that favors human capital (as opposed to physical capital) translates into higher per capita growth in income.