Education, Productivity and Economic Growth: A Selective Review of the Evidence

Article excerpt

FROM THE 1960S TO THE 1980S, economic growth was a relatively neglected topic in macroeconomics. (2) Macro textbooks and courses devoted little attention to the study of long-run growth, and focused mostly on business cycles, unemployment and inflation. It changed dramatically, however, since the end of the 1980s when economic growth came back to the front stage of the mainstream economics research agenda. In fact, economic growth now covers roughly one-half of typical macroeconomics courses. (3)

With the seminal contributions of Lucas (1988) and Mankiw, Romer, and Weil (1992), human capital has been, right from the start, one of the key actors in modern economic growth. Human capital has been seen, with R&D, as one of the candidate vehicles for knowledge accumulation and endogenous growth. As convincingly shown by Mankiw et al. (1992), the introduction of human capital in growth theory was necessary to reconcile neo-classical growth predictions with the quantitative aspects of economic development.

In this article, we review parts of the theoretical and empirical literature on human capital and growth with the objective of deriving insights about the likely effects of investment in post-secondary education on per capita income growth in Canada. Our review will be quite selective, focusing only on the issues that are most relevant for evaluating the macroeconomic gains of post-secondary education and for human capital policy in Canada.

After a discussion of the concept of human capital, our review starts with a brief overview of some theoretical considerations about the different approaches that have been used to analyze the role of human capital in growth. As will be argued below, the neo-classical growth model, extended to take into account the accumulation of human capital, is quite consistent with the cross-country empirical evidence, and its open-economy version is well suited for the analysis of economic and productivity growth in the Canadian context. As a result, this model has provided the theoretical background for much of the Canadian empirical literature on education and growth. The key prediction of this open-economy growth model, for our purposes, is that the evolution of capital and output will be largely driven by the accumulation of human capital. As will be discussed, this prediction appears to fit the evidence from Canadian data.

In principle, despite the solid evidence at the microeconomic level that education increases wages, investment in education will only generate macroeconomic benefits if it has real effects on aggregate productivity. It has been alleged in the theoretical literature that education could potentially increase individual wages without having any effect on productivity if it acts as a signalling device by conveying information to the labour market about the characteristics of workers (Spence, 1973). Macro-level evidence is necessary to assess the full aggregate productivity gains from education, including the gains that arise because of human capital externalities not reflected in wages. Moreover, the aggregate productivity gains of advanced education will depend on how rapidly the marginal benefits of education decrease with the level of education, and on how close an economy is from the technology frontier. Our survey will discuss the evidence about these issues.

The recent literature has devoted considerable attention to the measurement of human capital. Although the empirical literature has traditionally used years of education as indicator of human capital, what really matters for growth is the skills that are produced by education. We will review the recent evidence which highlights the critical importance of using, as human capital indicators, the measures that best proxy the output of the education system, when assessing the growth effects of education. The contrasting results of recent empirical studies that use measures of human capital based on educational inputs versus educational output suggest that improving the quality of education may be as important for growth, if not more important, as increasing enrolment rates (Hanushek and Woessmann, 2008). …