Since the late 1980's, much of the attention of macroeconomists has focused on the determinants of long-term economic growth. This paper emphasizes the role of education. The analysis distinguishes the quantity of education, measured by years of school attainment, from the quality, as gauged by scores on internationally comparable examinations.
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Using cross-country estimates of physical and human capital stocks, we run the growth accounting regressions implied by a Cobb-Douglas aggregate production function. Our results indicate that human capital enters insignificantly in explaining per capita growth rates. We next specify an alternative model in which the growth rate of total factor productivity depends on a nation's human capital stock level. Tests of this specification do indicate a positive role for human capital.
This report examines the rationale for putting investment in human capital at the forefront of policies aimed at promoting economic growth and social cohesion, as is done in the strategy outlined in the Lisbon Summit for turning the EU into the most competitive and dynamic knowledge-based economy in the world. On the basis of a review of the relevant academic literature, we reach the following broad conclusions. First, investment in human capital contributes significantly to productivity growth. Second, there is clear evidence that human capital plays a key role in fostering technological change and diffusion. Third, human capital investment appears attractive relative to alternative assets, both from the individual and from the aggregate perspectives. Fourth, policies that raise the quantity and quality of the stock of human capital are compatible with increasing social cohesion. On the whole, our findings suggest that investment in people is both a crucial growth factor, particularly in the current context of rapid technological change, and a key instrument for enhancing social cohesion, and are therefore supportive of the policy strategy set out in Lisbon.
Growth economists have spent more than forty years slowing chipping away at the Solow residual, largely by attributing increasingly larger chunks of it to investment in human capital. A few years ago we were reasonably certain that this was the way to go. But an increasing number of studies seem to be telling us that the effect of schooling variables on productivity vanishes when we turn to what seem to be the appropriate econometric techniques for the purpose of estimating growth equations. Should we take these results at face value? Before we do so and abandon the only workable models we have, it seems sensible to search for ways to reconcile recent empirical findings with some kind of plausible theory. In this paper we argue that we can make a fair amount of progress in this direction by combining two ingredients: better data on human capital, and a further extension of the human capital-augmented neoclassical model that allows for cross-country productivity differentials and for technological diffusion.
Conventional wisdom about the relationship between income distribution and economic development has been subjected to dramatic transformations in the past century. While Classical economists advanced the hypothesis that inequality is beneficial for economic development, the Neoclassical paradigm, which had subsequently dominated the field of macroeconomics, dismissed the Classical hypothesis and promoted the viewpoint that the study of income distribution has no importance for the understanding of macroeconomic activity and the growth process. A metamorphosis in these perspectives has taken place in the past two decades. Theory and subsequent empirical evidence have demonstrated that income distribution has a significant impact on the growth process. The modern approach has demonstrated that in the presence of credit market imperfections, income distribution has a long-lasting effect on investment in human capital, entrepreneurial activity, aggregate income, and economic development. Moreover, in contrast to the Classical viewpoint, which underscored beneficial effects of inequality for the growth process, the modern perspective advanced the hypothesis that inequality may be detrimental for human capital formation and economic development. The replacement of physical capital accumulation by human capital accumulation as the prime engine of economic growth has changed the qualitative impact of inequality on the process of development. In early stages of industrialization, as physical capital accumulation was a prime source of economic growth, inequality enhanced the process of development by channeling resources towards individuals whose marginal propensity to save is higher. In later stages of development, however, as human capital has become the main engine of economic growth, a more equal distribution of income, in the presence of credit constraints, has stimulated investment in human capital and economic growth. While the process of industrialization raised the importance of human capital in the production process, reflecting its complementarity with physical capital and technology, human capital accumulation has not benefited all sectors of the economy. Inequality in the owner- ship of factors of production has generated an incentive for some better-endowed agents to block the implementation of institutional changes and policies that promote human capital formation, resulting in a suboptimal level of investment in human capital from a growth perspective. The transition from an agricultural to an industrial economy changed the nature of the main economic conflict in society. Unlike the agrarian economy, which was characterized by a conflict of interests between the landed aristocracy and the masses, the process of industrialization has brought about an additional conflict between the entrenched landed elite and the emerging capitalist elite. In light of a lower degree of complementarity between human capital and the agricultural sector, education has increased the productivity of labor in industrial production more than in agricultural and primary good production, inducing rural-to-urban migration and a decline in the return to landowners. Thus, while industrialists have had a direct economic incentive to support education policies that would foster human capital formation, landowners, whose interests lay in the reduction of the mobility of their labor force, have favored policies that deprived the masses of education. The adverse effect of the implementation of public education on landowners' income from agricultural production has been magnified by the concentration of land ownership. As long as landowners affected the political process and thereby the implementation of growth-enhancing education policies, inequality in the distribution of land ownership has been a hurdle for human capital accumulation, slowing the process of industrialization and the transition to modern growth. Variation in the distribution of ownership over land and other natural resources across countries has contributed to disparity in human capital formation and the industrial composition of the economy, and thus to divergent development patterns across the globe. Moreover, in some societies geographical conditions that led to income inequality brought about oppressive institutions designed to maintain the political power of the elite and to preserve the existing inequality.
The role of improved schooling, a central part of most development strategies, has become controversial because expansion of school attainment has not guaranteed improved economic conditions. This paper reviews the role of education in promoting economic wellbeing, with a particular focus on the role of educational quality. It concludes that there is strong evidence that the cognitive skills of the population – rather than mere school attainment – are powerfully related to individual earnings, to the distribution of income, and to economic growth. New empirical results show the importance of both minimal and high level skills, the complementarity of skills and the quality of economic institutions, and the robustness of the relationship between skills and growth. International comparisons incorporating expanded data on cognitive skills reveal much larger skill deficits in developing countries than generally derived from just school enrollment and attainment. The magnitude of change needed makes clear that closing the economic gap with developed countries will require major structural changes in schooling institutions.
An emerging economic literature over the past decade has made use of international tests of educational achievement to analyze the determinants and impacts of cognitive skills. The cross-country comparative approach provides a number of unique advantages over national studies: It can exploit institutional variation that does not exist within countries; draw on much larger variation than usually available within any country; reveal whether any result is country-specific or more general; test whether effects are systematically heterogeneous in different settings; circumvent selection issues that plague within-country identification by using system-level aggregated measures; and uncover general-equilibrium effects that often elude studies in a single country. The advantages come at the price of concerns about the limited number of country observations, the cross-sectional character of most available achievement data, and possible bias from unobserved country factors like culture. This chapter reviews the economic literature on international differences in educational achievement, restricting itself to comparative analyses that are not possible within single countries and placing particular emphasis on studies trying to address key issues of empirical identification. While quantitative input measures show little impact, several measures of institutional structures and of the quality of the teaching force can account for significant portions of the large international differences in the level and equity of student achievement. Variations in skills measured by the international tests are in turn strongly related to individual labor-market outcomes and, perhaps more importantly, to cross-country variations in economic growth.
This paper examines whether the Solow growth model is consistent with the international variation in the standard of living. It shows that an augmented Solow model that includes accumulation of human as well as physical capital provides an excellent description of the cross-country data. The paper also examines the implications of the Solow model for convergence in standards of living, that is, for whether poor countries tend to grow faster than rich countries. The evidence indicates that, holding population growth and capital accumulation constant, countries converge at about the rate the augmented Solow model predicts.
The theoretical, conceptual, and practical difficulties with the use of cross national data on schooling are so large it is reasonable to avoid using this type of aggregate data for any purpose for which individual level data would do. There are, however, three questions for which the use of cross national data on schooling is necessary and could potentially help answer interesting questions. First, explaining the cross national differences in the evolution and dynamics of output growth is an important agenda. Do differences in the evolution and dynamics of schooling help explain the big facts about output growth? Largely, no. Second, the existence and magnitude of output externalities to schooling is an important question with at least normative policy implications, and evidence for externalities requires at least some level of spatial aggregation. Does the cross-national data provide support for output externalities? Largely, no. Third, cross national (or more broadly spatially aggregated) data allows the exploration of the impact on returns to schooling (or in the gap between private and social returns) of differences in economic environments. This last question has been and seems a promising line for future research.
This paper surveys the empirical literature on the growth effects of education and social capital. The main focus is on the cross-country evidence for the OECD countries, but the paper also briefly reviews evidence from labour economics, to clarify where empirical work on education using macro data may be relatively useful. It is argued that on balance, the recent cross-country evidence points to productivity benefits of education that are at least as large as those identified by labour economists. The paper also discusses the implications of this finding. Finally, the paper reviews the emerging literature on the benefits of social capital. Since this literature is still in its early days, policy conclusions are accordingly harder to find.
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