Where has all the education gone?

Cross-national data on economic growth rates show that increases in educational capital resulting from improvements in the educational attainment of the labour force have had no positive impact on the growth rate of output per worker. In fact, contends the author, the estimated impact of growth of human capital on conventional non-regression growth accounting measures of total factor productivity is large, strongly significant, and negative. Needless to say, this at least appears to contradict the current conventional wisdom in development circles about education’s importance for growth. After establishing that this negative result about the education-growth linkage is robust, credible, and consistent with previous literature, the author explores three possible explanations that reconcile the abundant evidence about wage gains from schooling for individuals with the lack of schooling impact on aggregate growth: 1) that schooling creates no human capital. Schooling may not actually raise cognitive skills or productivity but schooling may nevertheless raise the private wage because to employers it signals a positive characteristic like ambition or innate ability; 2) that the marginal returns to education are falling rapidly where demand for educated labour is stagnant. Expanding the supply of educated labour where there is stagnant demand for it causes the rate of return to education to fall rapidly, particularly where the sluggish demand is due to limited adoption of innovations; and 3) that the institutional environments in many countries have been sufficiently perverse that the human capital accumulated has been applied to activities that served to reduce economic growth. In other words, possibly education does raise productivity, and there is demand for this more productive educated labour, but demand for educated labour comes from individually remunerative but socially wasteful or counterproductive activities – a bloated bureaucracy, for example, or overmanned state enterprises in countries where the government is the employer of last resort – so that while individuals’ wages go up with education, output stagnates, or even falls.

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