Academic journal article Chicago Fed Letter

Can Higher Education Foster Economic Growth?

Academic journal article Chicago Fed Letter

Can Higher Education Foster Economic Growth?

Article excerpt

On October 30, 2006, the Chicago Fed will host a conference on higher education's role in economic growth. Speakers will include Richard Lester of MIT, Michael Luger of the University of North Carolina, Ned Hill of Cleveland State, Sean Safford of the University of Chicago Graduate School of Business, Larry Isaak of the Midwest Higher Education Compact, and Randy Eberts of the Upjohn Institute.

Countless observers have suggested that the role of higher education in a knowledge-driven economy has never been more crucial as innovation and human capital are seen as keys to future economic growth. For mature regions, such as the Midwest, it could be argued that colleges and universities might play an even larger role. The region is not likely to see rapid population growth and is home to many mature industries, placing a relatively high premium on innovation for transforming the economy. For the Midwest, it would appear that outsized productivity growth will be needed if the region is to hold its own against competing regions. The question is: Can the university system in the region foster these opportunities?

Not a settled question

Not all observers agree that higher education and economic growth are obvious or necessary bedfellows. On the one hand, prominent studies1 have reported on the direct and indirect economic impacts of universities on their local communities and regions.2 However, work by Richard Vedder3 has questioned whether spending more on higher education necessarily provides larger returns for the local economy. Vedder's work has found that states with higher spending on colleges and universities often fail to have faster economic growth than states with lower spending, even after controlling for differences in other key variables. While Vedder does not question whether higher education is an important ingredient in promoting economic growth, he does suggest that the returns to public investment in higher education may be limited.

Some of this controversy comes about because of the difficulty of measuring the exact contribution of colleges and universities to economic growth. Standard economic base analysis can do a good job of accounting for the payroll, spending, and employment contributions of a university to a community but relies on estimates of economic multipliers to determine the secondary benefits of university activities. Studies have produced a range of multipliers (ranging from 1.0 to 3.1), and estimates of economic benefits are highly sensitive to the choice of multiplier. Perhaps most problematic is that these studies cannot provide any estimate of whether this is the best use of economic assets for a given region. If the university were not in the community, the same land and resources would undoubtedly have been used for some other activity and may have produced a similar or higher level of economic growth. Other studies focus on the influence of universities' outputs on human capital and technology. These studies examine the role of higher wages received by college graduates in the local economy as reflected in higher tax revenues, consumer spending, and personal savings. Of course, for college towns to capture such benefits, graduates need to stay in the communities where they were educated.

So where does that leave us?

The Massachusetts Institute of Technology (MIT), in conjunction with the University of Cambridge in the UK, has developed an international research consortium to examine universities, innovation, and the competitiveness of local economies. The structure for this joint project (hereafter the MIT project) is to examine how universities can contribute to local innovation. At the core of the work is the belief that local economies succeed when firms are able to respond to changing market conditions by producing new products, services, and production methods. The role of the university in promoting these can take many forms. Most visible are technology transfer programs. …

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