The Effects of Education on Macroeconomic Growth

Teulings & van Rens debate the determinants of macroeconomic growth and consider the discrepencies between private and social human capital returns as well as the methods of createing economic growth through educational investments in their paper Education, Growth and Income Inequality.

Highlights from the paper -

Regression studies show that education does not affect the level of an economy’s GDP, but does affect the growth rate.

For every year of education the rate of private return decreases by two percent. There is a paradox since the return to human capital decreases when education levels rise because the relative scarcity of an educated worker becomes less and the relative scarcity of an uneducated worker rises.

This is further explained by the inverse relationship between the aggregate supply of education and its return. For example, only the most complex jobs have the highest return for education. When total levels of education rise, workers are forced to take less complex jobs, which decreases the human capital return.

Social return also does not equal the private return. This is, according the article, only because of endogenous technological progress, which reaches higher returns with higher education levels because of the increased profitability of skill biased technologies. This process reignites the return to human capital, but only on a social level. Consequently, the social human capital return is higher. Corollary criticism is that if the role of education is for technological diffusement, there is a negative return to experience and only newly educated workers should be desired. Also, because private returns to education don’t rise in the long term there is an argument about how much technological progress is skills biased.

Composition effect of education – unequal education results in larger income discrepancies.

Compression effect of education – higher average levels of education result in less income inequality.

On causality between economic growth and education, education most directly affects GDP growth because there is about a 10 year lag between the effects of economic growth on education while the inverse happens much quicker.

The paper raises the question of whether it is effective for a developing nation to attempt to import capital through an industrialization strategy, which was the essential method of growth for the Asian Tigers during the sixties and seventies and is is a strategy currently propulgated by some development experts?

Does the GDP to education lag affect the merits of this strategy?

Is technological progress really skill biased?

Is there an incentive for educated workers to limit others educational opportunities? It would keep their own wages higher and keep other labor inputs cheaper. Is this "descrimination" and does it happen?

How do nations combat the education lag and make investments in education most efficient? Should a developing nation import technology now and invest in education later?

BONUS - Methods of calulating educational returns, i.e. Mincer Function.