Contribution of Education and Training to Innovation and Growth Ludger Wößmann University of Munich and Ifo Institute Contribution of the European Expert Network on Economics of Education (EENEE) to the Symposium on the Future Perspectives of European Education and Training for Growth, Jobs and Social Cohesion Brussels, 19-20 June, 2007

Education in Growth Research Theory Augmented “neoclassical” growth theories Education as “human capital” Theories of endogenous growth Education  new ideas = innovation = technical change Theories of knowledge diffusion Education  adoption of new ideas generated abroad Initial evidence Early cross-country growth regressions Measuring education by average years of schooling Most recent version of available data:

Quantity of Schooling and Economic Growth Added-variable plot of regression of average annual growth rate of real GDP per capita in 1960-2000 on initial average years of schooling and initial level of real GDP per capita. Source: Hanushek/Wößmann (2007).

Educational Quality: International Student Achievement Tests Measuring knowledge, not sitting in the classroom International agencies conducted 36 international tests of students’ performance in cognitive skills since mid-1960s Combine tests on a common scale, mapped to PISA (Hanushek/Wößmann 2007)

Educational Quality and Economic Growth Added-variable plot of regression of average annual growth rate of real GDP per capita in 1960-2000 on initial level of real GDP per capita, average student achievement test scores, and initial average years of schooling. Source: Hanushek/Wößmann (2007).

Education as Determinant of Growth of Income per Capita, 1960-2000 Educational quality – measured by international tests of math and science – has a powerful effect on national growth rates Increases explanatory power of model from ¼ to ¾ Renders effect of quantity of schooling insignificant! Estimated effect is extremely robust to a variety of alternative specifications, observation periods, and tests of alternative mechanisms True both among OECD countries and among developing countries True in both sub-periods, 1960-1980 and 1980-2000 True for tests performed until 1984  growth 1980-2000

Education and Innovation Relative role of minimal and high-level skills Result: both a decent “education for all” and a sufficient number of “rocket scientists” are important for growth Panel data evidence Mechanism of impact of educational quality on growth: Primarily through affecting an economy’s rate of technical progress Rather than through increasing returns to a year of education or through static upward shift in production function as a whole

Additional Analyses Within-country analysis: Variation over time: In cross-country work, other factors that affect growth, such as efficient market organizations, may be associated with productive schools Concentrate on immigrants to US (Hanushek/Kimko AER 2000): Immigrants who received their education in home countries that have higher test scores earn more in the US Immigrants who received their education in the US do not see any earnings advantage linked to cognitive skills of their home country Variation over time: Improvements in test scores since early 1970s are related to increasing trends in growth rates

Improved Test Scores = Improved Growth Performance Trend in growth rates, 1975-2000 Trend in test scores since early 1970s

The Implications of Improved Educational Quality Two aspects of any educational reform plan important: Magnitude of reform accomplished? Benchmark: 0.5 standard deviation improvement How fast? School reform policies taking 10, 20, or 30 years (operating linearly) Impact on economy will not be immediate: new graduates from school will initially be a small to negligible portion of labor force Full impact is not felt until 35 years past full completion of reform Simulation of impact on economy:

Improved GDP with Moderately Strong Knowledge Improvement (0.5 s.d.)

Conclusions: Education  Innovation and Growth Educational quality – measured by what people know – has powerful effects on economic growth. Extremely robust relationship Improvements over time Both a decent “education for all” and a sufficient number of “rocket scientists” are important for growth. Mechanism appears to operate primarily through affecting rate of technical progress. Policies to promote long-run economic performance should concentrate on effective improvement of quality of education.

The EENEE Website – www.education-economics.org – www.education-economics.org as a forum to promote and disseminate research on the Economics of Education in Europe: www.education-economics.org www.education-economics.org Economics of Education References EENEE Mapping of Researchers Symposia What’s New