The returns to education: a review of the empirical macro-economic literature

The idea of positive educational externalities is that the benefits of individually acquired education may not be restricted the individual but might spill over to others as well, accruing at higher aggregation levels, in particular at macro-economic one. We offer an extensive summary and a critical discussion of the empirical literature on the of human capital on macro-economic performance, with a particular focus on UK policy. Key findings include: (1) Taking the studies as a whole, there is compelling evidence that human capital increases productivity. Although is an important theoretical distinction between the augmented neo-classical approach and the new theories, the empirical literature is still largely divided on whether the stock of education affects the long-run or growth rate of the economy. A one-year increase in average education is found to raise the level of output capita by between 3 and 6 percent according to augmented neo-classical specifications, while it would lead to an 1 percentage point faster growth according to estimates from the new-growth theories. (2) Over the short-run horizon (4 years) the empirical estimates of the change in GDP for a given increase in the human capital are of similar orders of magnitude in the two approaches. (3) The impact of increases at different levels of education to depend on the level of a country’s development, with tertiary/higher education being the most important growth in OECD countries. (4) Education is found to yield additional indirect benefits to growth (in particular, stimulating physical capital investments and technological development and adoption). More preliminary seems to indicate that type, quality and efficiency of education all matter for growth. The most pressing problems are the measurement of human capital; systematic differences in the coefficient of education countries (in particular between developing and developed countries) and reverse causality. We also recommendations for future research priorities.