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 Institution framework of the economy Openness of the economy Security of property rights Geography Fertility Gross Domestic Product Economic Growth

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 Private Spending Spending by businesses or privately owned companies Increased in more than three-quarter of the countries as well

Literature Review Economic growth affected positively by the increase in technological progress in addition to Factors of production Solow (1956) 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 Mankiw, Romer and Weil (1992) Education might increase the innovative capacity of the economy, along with increasing knowledge on new technologies and products Aghion and Howitt (1998)

Literature review 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 Liu and Armer (1993) Higher level of education impact growth negatively across a sample of Asian countries Mc Mahon (1998) Higher education have a small negative effect on GDP of Portugal Aubvn (2009)

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, :

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 CoefficientStd. Errort-ratiop-value const School attainment R-squared Adjusted R-squared F(1, 88) P-value(F)

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 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 Stiglitz (1975) 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 Learning Gap Between developing and developed In 2010, average Kenya student spent more years in schooling than an average French had in 1985 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 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 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 Introduce opportunities 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