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The role of education in economic
growth
Evelyn Chew (66388)
Le Hong Hanh (6112)
Overview
 Widely research topic in economics literature
 Education play a role in affecting economic growth
both directly and indirectly
 Great investment at micro level but on macro level
there are some doubts on benefits
Measures
Economic
Growth
• Institution framework of the
economy
• Openness of the economy
• Security of property rights
• Geography
• Fertility
• Gross Domestic Product
Measures
Quantity of Education
• Average years of schooling across working-age population
Quality of Education
• Average performance for standardized tests (Trends in
international mathematics and Science study (TIMSS) and
Programme for International Student Assessment (PISA))
• Teachers’ wages, educational program evaluations,
spending on education
Public VS Private Spending
Public Spending
• Spending by the government
• 83% of all funds for educational institutions comes from
Public (OECD)
• Increased across all levels from 2000-2008
Private Spending
• Spending by businesses or privately owned companies
• Increased in more than three-quarter of the countries as
well
Literature Review
Solow (1956)
• Economic growth affected positively by the
increase in technological progress in addition
to Factors of production
Mankiw, Romer
and Weil (1992)
• Education increases the human capital
inherent in the labor force which increases
labor productivity and thus transitional growth
towards a higher equilibrium level of output
Aghion and
Howitt (1998)
• Education might increase the innovative
capacity of the economy, along with increasing
knowledge on new technologies and products
Literature review
Liu and
Armer (1993)
Mc Mahon
(1998)
Aubvn
(2009)
• Found that both primary and junior-high achievement
variables add explanatory power to economic growth in
Taiwan
• Senior-high and college education did not exert any
effect on growth
• Higher level of education impact growth negatively
across a sample of Asian countries
• Higher education have a small negative effect on GDP of
Portugal
Theoretical approaches
• Neoclassical growth theories
• Theories of Endogenous growth
• Theory of Economic Growth
Neoclassical growth theories (1)
Solow model:
Y= f (K, AL)
Where Y is output, K is capital and L is labor and A is
measurement of the level of technology. AL is labor
force measured in efficiency units, which incorporate
both the amount of labor and the productivity of labor
as determined by the available technology
Neoclassical growth theories (2)
The production function exhibits constant returns to
both inputs. One of functions satisfying these
assumptions is the Cobb-Douglas production
function:
Where 0<a<1.
Neoclassical growth theories (3)
Let a dot over a variable denotes changes per unit of
time
Where s is rate of saving, δ is the rate at which the
capital depreciates, k is capital stock per efficiency
units. Technology and population growth at a
constant exogenous rate, equal to and n respectively.
Neoclassical growth theories (4)
The transition period and the steady-state in Solow
model
Neoclassical growth theories (5)
In the Mankiw, Romer and Weil (1992) model, human
capital (H) become important in their model:
Where
.Let sK be the income share
spent on physical capital accumulation (that is the
saving rate) and sH be the income share spent on
human capital accumulation
Neoclassical growth theories (6)
Theories of Endogenous growth(1)
Let fi is the production function of an individual firm:
Where ai is the level of knowledge of an individual firm,
ki represents other factors of production (capital, labor,
etc.), and A is the general level of knowledge in the
economy. We assume that other inputs are constant.
The production function shows a increasing returns with
respect to all inputs (a,k,A) and constant returns with
respect to a and k:
Theories of Endogenous growth(2)
Since, all the firms are identical:
At the individual firm’s level :
At the social (whole economy) level:
Marginal knowledge of products, technology, etc. at the
social level is increasing while the firm's point of view it
is decreasing or constant:
Theory of Economic Growth(1)
This is the other version of the innovation-based growth
theory known as the "Schumpeterian" theory developed
by Agion and Howitt (1992) and Grossman and Helpman
(1991). In Schumpeteriam theory aggregate output is
again produced by a continuum of intermediate products:
Where L is the aggregate supply of labor (assumed to be
constant), x(i) is the flow input of intermediate product.
There is a fixed measure of product variety, normalized to
unity, and each intermediate product i has a separate
productivity parameter A(i).
Theory of Economic Growth (2)
An innovation in sector i consists of a new version
whose productivity parameter A(i) exceeds that of
the previous version by the fixed factor
The growth rate of A(i) is:
Therefore the expected growth rate of A(i) is:
Theory of Economic Growth (3)
Another model is growth accounting with the
formula:
Theory of Economic Growth (4)
Labor (L), physical capital (K), human capital (H) and
TFP contribution to economic growth in Poland,
2005-2011:
Empirical approaches
• The quality of schooling and economic
growth
• The importance of cognitive skills for
economic growth
The quality of schooling and
economic growth (1)
Each year of schooling is associated with a long-run
growth increase of 0.58% percentage points
The quality of schooling and
economic growth (2)
Model 1: Pooled OLS, using 90 observations
Included 30 cross-sectional units
Time-series length = 3
Dependent variable: Growth rate of GDP
Robust (HAC) standard errors
Coefficient Std. Error t-ratio p-value
const
2.18506 1.6456
1.3278 0.18768
School attainment 0.110882 0.146329 0.7578 0.45062
R-squared 0.004352
Adjusted R-squared -0.006962
F(1, 88)
0.384681
P-value(F) 0.536712
The quality of schooling and
economic growth (3)
The importance of cognitive skills
for economic growth(1)
The importance of cognitive skills
for economic growth(2)
The returns to cognitive skills are generally strong
across countries
Education negatively affect
Economic Growth
Sorting
Theory
Stiglitz
(1975)
• Education serves as a filter rather than an investment
• Sorts individuals into different categories not in line with their
competitive advantage (efficiency loss)
• Individuals with good grades or higher education level seen as
highly skilled
• Market pay workers accordingly to their marginal product
• No differentiation made, individuals receive wages equal to the
mean productivity of the population
Education negatively affect
Economic Growth
Education Institution limits
• Individuals uninformed about their own abilities and
hence what they should earn
• Developing countries eg. Liberia
• Educational institutions not fulfilling their social marginal
product of finding each individual’s comparative
advantage
• Not rewarded for their comparative skills
Education negatively affect
Economic Growth
• Between developing and developed
• In 2010, average Kenya student spent more years in schooling than an average
French had in 1985
Learning Gap • Kenya’s GDP per capita in 2010 was only 7% of France’s GDP then
Reasons
• Quality of education received is lower
• Students not learning as much
• Eg. India, increase in school enrollment from 82% to 87% in 2011. Proportion of
students who could do long division fell from 70% to 57%
Results
• Varying returns to education due to this learning gap
• Eg. In US, college degree lets you earn $24000 more than those who do not have
but in Nigeria its only $200 more
Discussion
Increase competition
Introduce opportunities
• Introducing
independently operated
schools to increase
education quality
• Increase private
spending on education
• Eg. Share of students
attending independent
school in Netherlands
raise annual growth rate
by 0.92pp
• For those who have an
education to use skills
they learn
• Difference in wages for
college graduate due to
lack of demand for them
Conclusion
Education positively affects economic
growth
No fix solutions to tackle issues where
education affects negatively
More research needs to be done on
finding how education reforms can
improve EG