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Education and Economic Growth

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There are two reasons why people can expect a relationship between Education and Economic Growth. Firstly, living standards have risen since the end of the 19th century. One factor can be Education (others can be technological improvement and innovations), as it was not observed at the same pace in the illiterate countries ; they started to merge into the economic world only approximately 200 years ago. People need to be educated if they want to function in an advanced society, benefit from scientific advance and contribute to it. Then, many econometric studies show that incomes depend on the level of education of a person. This last outcome leads to a question : if these more educated people can earn more, isn’t it supposed to be true for a nation (as it is a grouping of individuals) ? If money spent on education has some returns, it is possible to talk about investment on Human Capital and the process of education may be seen as an investment decision.

According to Mincer’s model (1974), individual earnings are a function of years of education (between others). This model implies that a change in a country’s average level of schooling must be a major determinant of income growth. Mincer showed that if the opportunity cost of students’time is the cost of going to school and if this additional time at school causes a proportional increase of incomes over lifetime, the log of earnings is linearly related to people’s years of schooling. The slope represents the rate of return to investment in schooling. However, the fact that at the individual level, investing on education increases earnings does not necessarily imply that the same would happen at the aggregate level – it could happen that you earn more when you are more educated than the average, but that if everyone becomes more educated, then earnings do not change. As Mincer’s equation applies at the individual level, we must be careful when trying to apply this at country level. It is true that at the World level, we can observe a postive relationship between level of income and income per capita of a country and the level of education of its population, but the causality is discussed.  Krueger and Lindhal (2001) state that when taking into account measurement error, they show that education and growth are positively correlated.

Psacharopoulos’ international survey (1992) indicated that the level of education has also some social returns. The social aspect must thus be taken into account as well. It can be either higher or lower than monetary return. It can be higher due to externalities like more informed political decisions or reduction in crime, and can be lower because education could only be a credential (as Machlup and Spence indicated in 1970 and 1973). Notice that this study do not measure externalities ; it measure private and social returns but the difference between the two regards only public expenditure.

However, both studies lead to one fact : rates of social returns get smaller with the « amount » of education. It means that primary school has a greater impact than tertiary education. This also significates that one extra year of education raises labour income in a greater proportion in developing countries than in advanced ones. In other words, returns to education decrease with levels of development. Education can also affect national income in ways that differ from wage rates – especially in developping countries where education is positively linked to children’s health or labour participation, for example.

Author: studentnovasbe

Master student in Nova Sbe

One thought on “Education and Economic Growth

  1. On growth and education it is important to look at the investments in education made in the 20th century on the developing world that led to almost universal enrollment rates in primary school in most countries. Contrary to what many studies show, this increase in educational attainment was not followed by economic growth. Either this happened due to directions of causality (what causes what?) or due to quality aspects. If quality education is the one to blame, maybe we should change the discussion on education in the developing world to be more focused on investing in quality universal education, which hopefully generates social and economic returns for countries.