Transcript The contribution of higher education to economic growth Craig Holmes Higher Education and the Economy seminar 25th November 2014 www.skope.ox.ac.uk.

The contribution of higher
education to economic growth
Craig Holmes
Higher Education and the Economy seminar
25th November 2014
www.skope.ox.ac.uk
Introduction
• “there is compelling evidence that …higher education is the
most important phase of education for economic growth in
developed countries.” (DES, 2004, pg. 58)
• How might it do this?
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Introduction
• “The capacity for systematic invention, the capacity readily to perceive and
apply the results of scientific progress, and the capacity for leadership both
in the fields of organisation and in the transmission and the sifting of ideas
- such capacities, if they do not come solely from education at the higher
stages, certainly derive in a large measure from the existence of a
sufficient proportion of persons educated to this level and of institutions
devoted to higher education and research (Robbins Report, p. 206)”
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Key terms and definitions
• National income = national output = national expenditure
• Gross domestic product (GDP):
–
–
–
–
Private consumption
Investment
Government expenditure
Trade balance
• GDP per capita = income per person
• Real vs. nominal
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National income
50000
45000
40000
Australia
35000
France
GDP, $ constant PPP
Germany
30000
Hungary
Japan
25000
Sweden
20000
United Kingdom
United States
15000
Brazil
China
10000
Korea
5000
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
0
Source: World Bank
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Economic growth
Real GDP growth
8
6
4
2
0
1950
1960
1970
1980
1990
-2
-4
GDP growth, %
-6
GDP per capita growth, %
-8
Source: ONS
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2000
2010
2020
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Real GDP growth per capita, %
Economic growth
8
6
4
2
0
-2
-4
United Kingdom
United States
-6
Source: World Bank
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1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Real GDP per capita growth, %
Economic growth
10
5
0
-5
France
Germany
-10
Hungary
Sweden
United States
-15
Source: World Bank
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1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Real GDP per capita, %
Economic growth
15
10
5
0
-5
United States
Brazil
China
-10
Korea
Source: World Bank
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Economic growth
10.00
8.00
Real GDP per capita growth, %
6.00
4.00
World
High income
2.00
Middle income
Low income
0.00
1980
1985
1990
1995
2000
-2.00
-4.00
-6.00
Source: World Bank
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2005
2010
Seminar outline
1. Economic theory on education and growth
2. Empirical analyses of education and growth
– Specific studies looking at higher education
3. Problems with evidence
4. Implications for policy
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The production function
• Simple production function:
𝑌 = 𝐴. 𝐹(𝐾, 𝐿, 𝐻)
• Mankiw, Romer and Weil (1992):
𝑌 = 𝐴𝐾 𝛼 𝐿𝛽 𝐻𝛾
–
–
–
–
Diminishing returns to each factor of production – α, β and γ < 1
Constant returns to scale – α+β+γ = 1
H = hL
A = productivity, for a given set of production factors. Captures what
can’t be measured, including technological progress, resource shocks
and the health of institutions
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Output and productivity
11.0
10.5
10.0
FRA
ITA
AUT
ESP
9.5
ln GDP, 2000
NOR
JPN
USA
CHE
DNK
SWE
IRL
GBR
NLD
CAN
FINDEU
BEL
AUS
ISR
ISL
PRT
SVN
9.0
MEX
8.5
TUR
BRA JAM
DOM
COL
TUN
DZA
IRN
8.0
7.5
GRC
CRI
MUS
BWA
ZAF
VEN
MYS
THA
KOR
NZL
ARG
URY
CHL
PAN
SVKCZE
HUN
POL
CUB
JOR
PER
ROM
BGR
ECU
7.0
CHN
6.5
6.0
4
5
6
7
8
9
Schooling years, 2000
Source: World Bank, Barro-Lee (2000)
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10
11
12
13
Output and productivity
11.0
LUX
10.5
ISL
AUT
10.0
ITA
ESP
9.5
ln GDP, 2000
NOR
CHE
DNK
SWE
IRL
NLD GBR
FIN
DEU
BEL
FRA
AUS
PRT
SVN
GRC
JPN
USA
CAN
ISR
NZL
KOR
9.0
SVKCZE
LCA
TUR POL
PAN
8.5
MUS
8.0
MEX
HUN
CRI
EST
LVA
DOM
LTU
PER
7.5
ROM
BGR
7.0
6.5
6.0
0
5
10
15
20
25
30
% workforce with tertiary education, 2000
Source: World Bank (2000)
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35
40
45
Education and growth
1. Neoclassical growth model
–
–
Solow, 1956 (without human capital)
Mankiw, Romer and Weil, 1992 (with human capital)
2. Endogenous growth models
–
–
Spillovers from capital investment
Innovation
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Neoclassical growth model
• Economy reaches a steady state (k*):
Replacement capital = k *(population
growth + depreciation rate)
Saving and
investment
Investment in k = saving rate * output
new investment
Required
replacement
capital
k0
k0 + new
investment
k*
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Capital stock per
worker, k
Neoclassical growth model
• Short run growth is driven by accumulation
• Long run growth at the steady state
– Capital stock increases until investment = depreciation
– Long run growth = technical progress
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Neoclassical growth model
• Mankiw, Romer and Weil (1992):
– Both human and physical capital are accumulated
– Human capital:
• requires investment (share of national output diverted into
education and training)
• depreciates (skills lost if underused, or become obsolete following
technical progress, or people retire)
– Diminishing returns to investment  There is a steady
state level of both k and h.
– Once reached, long run growth depends on A.
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Endogenous growth
• Lucas (1988):
– Human capital produces spillovers (onto other workers)
that raise overall productivity.
– If spillovers are large enough, diminishing returns to scale
become constant returns i.e. double the capital stock
double output per worker
– Simplify as a broad measure of capital:
𝑦 = 𝐴𝑘
– No steady state
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Human capital and growth
Investment in k = saving rate * output
Saving and
investment
Replacement capital = k *(population
growth + depreciation rate)
Broad capital stock per worker, k
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Human capital and growth
• Physical capital can accumulate without bound.
• What about human capital?
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Human capital and growth
• Human capital in Lucas’ model is non-rival:
– Investment (time spent studying) builds upon existing
human capital
– Can be used by everyone, including later generations
– Is this a satisfactory assumption for investment in HE?
• Rival vs. non-rival human capital
– Skills
– Knowledge
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Empirical studies
• Model options:
– Neoclassical / conditional steady state models (e.g. Mankiw, Romer
and Weil, 1992)  saving rates for human capital and physical capital
and initial income (all per capita)
– Growth accounting  growth rate of human capital stock (increase in
average years of education) and growth rate of physical capital stock
but not initial income
– Endogenous growth  absolute increase in human capital stock
(initial average years of education) and (possibly) initial income
– Quality vs. quantity measures (e.g. Hanuschek and Woessmann, 2007)
– average performance on international tests (e.g. PISA 2006)
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Empirical studies
• What evidence supports policy claims
• By the time of the Dearing Report in 1997:
– One cross country analysis (Gemmell, 1996, looking at 1960-1985)
– “However the cross-section evidence for higher education remains
limited…the robustness of these results is uncertain” (Gemmell, 1997,
paragraph 3.19)
• By the time 2006 and 2011 reforms:
– Supporting evidence from Gemmell (1996) or literature reviews which
relied on it.
• Results that follow taken from Holmes (2013) which tests all
the above model specifications
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Results 1: steady state
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Results 2: growth accounting
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Results 3: endogenous growth
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Results 4: extensions
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Problems with growth studies
• Krueger and Lindahl (2001) find numerous problems
with macro growth studies:
–
–
–
–
–
Errors in education data
Controlling for capital
Assumptions about returns being constant across time
Causality
Other omitted variables
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Problems with growth studies
• Robustness:
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Comparison with other studies
• Aghion et al. (2009)
– increases in patenting in the US can be attributed to exogenous
increases in spending on four-year degree courses at research
intensive universities, and subsequently economic growth.
• Vandenbussche et al. (2006)
– link between five-year growth rates and higher education, once
distance from the technological frontier is controlled for
– Measure of variable: share of labour market with a tertiary education
degree
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Comparison with other studies
• BIS (2013)
– 15 country, EUKLEMS data, 1982-2005
– Finds a 0.2-0.5pp increase in productivity for a 1pp increase in the
employment share of graduates
– Possible problems:
• Education is only captured by graduate employment share (as with Vandenbussche,
2006)
• Model mixes levels (human capital) with flows (investment)
• Causality is overstated (for above reasons, plus reverse causation)
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Discussion
• How does this week’s material fit in / conflict with
what you have studied so far?
• What are the policy implications?
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The expansion of HE in the UK
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The expansion of HE in the UK
• The occupational composition has changed in favour of
graduates, but not enough
• Labour Force Survey, 1995-2008, 3 digit occupations:
Undergraduates
and postgraduates
Higher (sub
degree)
qualifications
Apprenticeships
Lower
qualifications
Occupational
composition
2.9%
1.1%
-1.1%
-2.8%
Residual
5.6%
-1.0%
-5.0%
-5.5%
Total change
8.5%
0.1%
-6.1%
-8.3%
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The expansion of HE in the UK
• The big questions for “high skills vision” are:
1. Do non-graduate jobs get upgraded when more graduates
are available?
2. Does graduate expansion facilitate increases in demand for
skills?
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Change in relative graduate influence
Job upgrading
0.6
Corporate managers
Media associate professionals IT technicians
Public service professionals
0.4
0.2
0
0.000
0.050
0.100
0.150
0.200
0.250
-0.2
0.300
0.350
0.400
Sales associate professionals
Managers in agriculture and forestry
-0.4
-0.6
-0.8
Legal professionals
High initial relative graduate influence
Low initial relative graduate influence
Increase in graduate share, 2004-2011
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Health associate professionals
Research professionals
Therapists