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a blog from young economists at Nova SBE

Education and Growth: a debate

“We trust our health to the physician; our fortune and sometimes our life and reputation to the lawyer and attorney. Such confidence could not safely be reposed in people of a very mean or low condition. Their reward must be such, therefore, as may give them that rank in the society which so important a trust requires. The long time and the great expense which must be laid out in their education, when combined with this circumstance, necessarily enhance still further the price of their labor.”

Written more than two hundred years ago, Adam Smith’s An Inquiry into the Nature and Causes of the Wealth of Nations already referred one of the most well established facts in Economics: on average, more educated people receive higher wages.

Taking this reasoning to a macro level, economists believed that the answer to promote long term sustained growth is to invest on human capital. This idea was one of the most important features of the “new growth” literature initiated by Lucas (1988) and Romer (1990). To cut a long story short, if the first scholar suggests that the productivity of the labor force depends on the aggregate skill level, the second one argues that more educated workers often generate more innovative ideas. Under this framework, development is mainly the result of endogenous rather than external forces. Therefore, knowledge based economies benefit from spillover effects and from positive externalities from education (Acemoglu et al., 2001).

Nevertheless, the macroeconomic data has failed to demonstrate that the impact of education on aggregate output is greater than the aggregation of the individual impacts. Moreover, the impact of education has varied widely across countries (Temple, 1999). There are three possible explanations. First, if schooling performs a signaling role, social returns to education can be lower than private ones leading to unreasonable human capital accumulation which has lowered economic progress. Furthermore, while the supply of education has expanded, the demand for educated employment persisted lower in some nations. Consequently, marginal returns to education fell rapidly. Last but not least, educational quality is also not the same from country to country.  In those cases where it has been consistently low, “the number of years of schooling” did not raise cognitive skills considerably. Although it is clear that the magnitude and combination of these three phenomena vary worldwide, explaining the actual economic impact of education constitutes an outline of central significance for policymakers.

In recent times, other economists broke the previous consensus and adopted a “revisionist” perspective, highlighting that the role of education to development has been overstated (Princhett, 2001).

To conclude, there are two main reasons that contribute to this dispute between these extreme versions. The first is due to the difficulty to define, in a conceptual way, a proper measure of what human capital is. Finally, the second argument reflects the low quality of data gathered to perform empirical studies, especially in developing countries (De la Fuente and Domenech, 2006).

João Pereira dos Santos

 

References:

Acemoglu, A., & Angrist, J. (2001). How large are human-capital externalities? Evidence from compulsory schooling laws. NBER Macroeconomics Annual, 2000, 9–59.

De la Fuente, A., & Domenech, R. (2006). Human capital in growth regression: How much difference does quality data make? Journal of the European Economic Association, 4, 1–36.

Lucas, R., (1988).On the mechanics of economic development. Journal of Monetary Economics, 22(1), 3–42.

Pritchett, L. (2001). Where has all the education gone? World Bank Economic Review, 15(3), 367–391.

Romer,P. (1990).Endogenous technological change. Journal of Political Economy, Part 2, 98(5), S71–102

Temple, Jonathan, 1999. “A positive effect of human capital on growth,” Economics Letters, Elsevier, vol. 65(1), pages 131-134, October.

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Author: studentnovasbe

Master student in Nova Sbe

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