Working Paper: CEPR ID: DP3863
Authors: Coen N. Teulings; Thijs van Rens
Abstract: Estimates of the effect of education on GDP (the social return to education) have been hard to reconcile with micro-evidence on the private return. We present a simple explanation that combines two ideas: imperfect substitution between worker types and endogenous skill-biased technological progress. When types of workers are imperfect substitutes, the supply of human capital is negatively related to its return, and a higher education level compresses wage differentials. We use cross-country panel data on income inequality to estimate the private return and GDP data to estimate the social return. The results show that the private return falls by 1.5 percentage points when the average education level increases by a year, which is consistent with Katz and Murphy's [1992] estimate of the elasticity of substitution between worker types. We find no evidence for dynamics in the private return, and certainly not for a reversal of the negative effect as described in Acemoglu [2002]. The short-run social return equals the private return, but the long-run return is two times higher, providing evidence in favour of endogenous technological progress. The rise in education is the major cause of productivity growth over the sample period 1960-90.
Keywords: education; growth; inequality
JEL Codes: E20; J24; O10; O15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increase in average education level (I25) | decline in private return to education (I26) |
| increase in average education level (I25) | compress wage differentials (J31) |
| decline in private return to education (I26) | decline in income inequality (D31) |
| short-run social return (O35) | private return (Y60) |
| long-run return (G17) | productivity growth (O49) |
| rise in education (I24) | productivity growth (O49) |