Schooling and Economic Growth: What Have We Learned?

Abstract

This paper explains why different studies present widely-varying estimates of the effect of increased schooling on national income. It shows that when correctly-interpreted, these studies support the hypothesis that a one-year increase in average schooling attainment raises national income directly by about 10% and indirectly by about 19%. The increases in national income are larger than the aggregate effect of higher workers’ salaries, because schooling has external effects on national income. Due to the rising cost of additional years of schooling, the national return on investment in schooling is much lower in more educated countries. The estimated real national return on investment in schooling in 2005 ranged from over 40% in the least educated countries to 8.5% in the most educated countries. Average levels of schooling and average test scores at ages 9 to 15 generally rise together, so either measure of human capital can explain differences in national income or growth rates across countries. Since the productivity of physical capital depends on the level of human capital, in a global financial market, the growth in human capital largely determines the growth in physical capital and in national income.