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Are Education Externalities Very Large? In Chapter 10 we suggest that there are likely to be externalities to education. The differences between social and private returns to education found by many researchers supports our conclusions. Recall also that our example in Case Study 10-1 on vicious cycles bases its outcome on the variation in externalities under universal education and education of the few. So it was surprising to read that Daron Acemoglu and Joshua Angrist found little evidence of education externalities in the United States. Their research results are carefully reported in the first Chapter of Ben S. Bernanke and Kenneth Rogoff, eds. (2000), NBER Macroeconomics Annual, Cambridge, MA: MIT Press. Acemoglu and Angirst found that there is indeed a high correlation between wages and average schooling levels. They even found, as others have before them, that individuals earn more when everyone is more educated, a seemingly-obvious sign of externalities. But Acemoglu and Angirst argue that there could be a self-selection process that leads higher-paying growth industries and more able workers to locate in areas with greater amenities, and those amenities tend to be closely related to education levels. To disentangle the various relationships, the authors applied sophisticated statistical methods that isolated the effect of general education on individuals' wages. They then found that the external returns to investments in primary and secondary education in the United States between 1960 and 1980 were definitely less than 1 percent per year of schooling. Statistically, the relationship was insignificant, meaning that the evidence is not strong enough to safely conclude that the returns are different from zero percent. |
Does Schooling Cause Growth? Many empirical studies have found schooling to be positively related to economic growth. You may recall the article by Mark Bills and Peter Klenow discussed in Section 10.4, which found that the positive relationship between education and growth was more likely the result of growth causing increased schooling than schooling causing increased growth. Their paper has now been published: Mark Bils and Peter J. Klenow (2000), "Does Schooling Cause Growth?," American Economic Review, Vol. 90(5), pp. 1160- 1183. Bils and Klenow suggest a number of reasons why the results linking growth to schooling may be misleading: (1) Many countries with high school enrollment rates also experienced rapid increases in labor force participation, and the statistical methods were not able to disentangle the two distinct effects on growth, (2) exogenous factors may have influenced both education and growth, and (3) there may actually be reverse causality from growth to schooling. Their latter point is especially likely. As Bils and Klenow explain: ...anticipated growth reduces the effective discount rate, increasing the demand for schooling. Schooling involves sacrificing current earnings for a higher profile of future earnings. Economic growth, even of the skill- neutral variety, increases the wage gains from schooling. (p. 1160) In the same issue of the American Economic Review, Eric A. Hanushek and Dennis D. Kimko (2000), American Economic Review, Vol. 90(5), pp. 1184-1208, find that direct measures of labor-force quality from international mathematics and science test scores are strongly correlated with economic growth. They also find, however, that expenditures on schooling are not correlated with student performance, and, hence, expenditures on schooling are not related to economic growth. |
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The relationship between Bils and Klenow's results and Hanushek and Kimko's results are open to your
interpretation, of course. Some of Hanushek and Kimko's conclusions provide some good clues, however.
For one thing, they conclude that because expenditures do not influence school quality, the reverse
causal relationship from growth to schooling is not the reason for the positive correlation between
growth and education quality. In their words: We conclude that labor-force quality differences are important for growth; that these quality differences are related to schooling (but not necessarily the resources devoted by a country to schooling); and that quality has a causal impact on growth. At the same time, the simple estimates of cross-country growth relationships appear to overstate the causal impact of quality. The precise cause or magnitude of this overstatement is unclear. (p. 1204) So we learn more, but we are still along way from understanding the exact role of education in the process of economic growth. |