Human capital in a global and knowledge-based economy

Directorate-General For Employment Social Affairs And Inclusion

Description

Part IIAssessment at the EU country level : final report
Economic policy - Economic and Monetary Union
Education policy
Target audience: Specialised/Technical

Sujets

• Investment
• Education
• Productivity
• Economic growth
• Labour economics
• Member state of the European Union

Informations

• Publié par: DIRECTORATE-GENERAL-FOR-EMPLOYMENT_SOCIAL-AFFAIRS-AND-INCLUSION
• Nombre de lectures: 50
• Langue: English
• Poids de l'ouvrage: 1 Mo

Extrait

Human capital in a global
and knowledge-based
economy
Part II: assessment at the EU
country level
FINAL REPORT
Angel de la Fuente
Instituto de Análisis Económico (CSIC)
Employment and European Social Fund
European Commission
Directorate-General for Employment and Social Affairs
Unit A.1
Manuscript completed in April 2003Angel de la Fuente*
Instituto de Análisis Económico (CSIC)
Abstract
This report is an extension and partial update of de la Fuente and Ciccone (2002). It constructs
estimates of the private and social rates of return on schooling for fourteen EU countries using
microeconometric estimates of Mincerian wage equations, the results of cross-country growth
regressions and OECD data on educational expenditures, tax rates and social benefits. The results are
used to draw some tentative conclusions regarding the optimality of observed investment patterns and
educational subsidy levels.
(*) I am grateful to Vittorio Campanelli, Antonio Ciccone, Rita Asplund, Andrea Bassanini, John Bradley,
Giorgio Brunello, David de la Croix, Ugo Fratesi, Omar Licandro, George Psacharopoulos, Andrés Rodriguez-
Pose, Barbara Sianesi, Ludger Wössman, Stephen Wright, David Young and Thomas Zwick for their useful
comments on an earlier draft of this report. I would also like to thank Col Harmon and Jon Danielsson for their
help in locating some of the data used in this study and Juan Antonio Duro for his helpful assistance.Foreword
Investment in human capital has within the space of a few years taken on a key role in
the political debate. This has been possible thanks to commitments made in Lisbon
aimed at making the European Union the most competitive and dynamic knowledge-
based economy in the world. It is also due to the European employment strategy and to
progress in cooperation in the field of education. These two advances are reminders of
the crucial importance of qualifications, lifelong learning, the capacity to innovate and
adaptability.
The European Commission has supported these developments at the political level as
well as in terms of research, with the aim of understanding the links between investment
in human capital, growth and social progress. The appearance of the second volume of
"Human capital in a knowledge-based global economy" by Prof. Angel de la Fuente of
the Centro de Análisis Económico in Barcelona bears witness to this commitment.
The book takes up and refines the conclusions of the first report, drawn up by the same
author with the assistance of Prof. Antonio Ciccone from the University of Fabra. In
particular, it transposes the analysis to the level of each country in the European Union,
and thereby shows a range of situations according to the level of private and social
return from human capital. These differences between countries call for appropriate
interpretations. In general - thanks to improvements in the econometric model and in
databases - this second volume has been able to rectify and fortify certain estimates of
the increase in short- and long-term aggregate productivity presented in the first report.
The results have been discussed by a panel of 15 university experts.
In summary, the chief merit of these studies funded by the Employment and Social
Affairs Directorate-General lies in opening up a discussion long overdue in Europe,
although well-developed in the Anglo-Saxon countries. These studies have made it
possible to sketch out a methodology, test estimating techniques and refine the quality
of data. The robust results obtained provide solid technical support for Community
guidelines relating to the policies for the development of human resources defined in the
Lisbon strategy, the social agenda, the European employment strategy and the broad
economic policy guidelines.
This study reminds us that investment in human capital represents in any circumstances
an opportunity for the individual, for families, undertakings and society, and that it
becomes a necessity in a knowledge-based global economy. The advantages amount to
much more than the economic return measured by this study. Limiting the scope of the
analysis does not signify ignorance of the contributions made by human capital to social
inclusion, cultural progress and the integral well-being of human beings. Unfortunately,
these dimensions are more difficult to quantify empirically. The aim of the study is to
contribute to the enrichment of growth policies on the basis of empirical arguments. It
should also respond to the growing interest in recent years from political decision-
makers in the theme of human capital.
We recommend that experts in economic development – particularly in those regions
lagging behind – and all those with decision-making powers in this field examine and
3profit from this report. The aim is to recognise the true value of human capital in any
process of economic development and social inclusion.
Odile Quintin
Director-General
4TABLE OF CONTENTS
Executive summary 7
Main report
1. Introduction 11
2. Theoretical framework: the rate of return to schooling 13
a. The private rate of return to schooling 16
b. The social rate of return to schooling 19
3. The private return to schooling and the incentive to invest in education 21
a. Data and sources 21
b. Basic results 26
c. The impact of public policies and student unemployment 29
d. How does the private return on schooling compare with that
on alternative assets? 33
4. The social return to schooling and the optimal investment pattern 35
a. Data and sources 35
b. Parameter values and the effects of human capital on aggregate productivity 37
c. Results 39
d. The relative returns to investment in schooling and in physical capital 42
5. Comparing private and public returns and implications
for the financing of education 44
a. Private returns allowing for participation effects in partial
and in general equilibrium 45
b. Private vs. social premia on schooling 50
6. Conclusion and policy implications 51
Appendix
1. The direct cost of schooling 54
a. Secondary education 54
b. Higher education 55
c. Total expenditure 58
2. Mincerian returns to schooling at the individual level 59
3. Employment probabilities and employment effects of schooling 61
Correcting for differential student employment probabilities 65
4. Tax and benefit parameters 66
5. The private return to schooling: detailed results 67
6. A plausible range of macroeconomic parameter estimates 70
7. The rate of return on physical capital 75
8. Reconciling micro and macro estimates of the returns to schooling: a simple model 77
References 81
Discussion 83
1. Rita Asplund – ETLA Helsinki 84
2. Andrea Bassanini – OECD Paris 87
3. John Bradley – ESRI Dublin 91.
Giorgio Brunello – Universität Padova 94
5. David de la Croix – UCL Louvain la Neuve, B. 96
6. Ugo Fratesi – Universität Bocconi – Milan 100
7. Omar Licandro – EUI Florence 103
8. George Psacharopoulos – University Athens 105
9. Andrés Rodriguez-Pose – LSE London 107
10. Barbara Sianesi – IFS London 110
11. Ludger Wößmann, Kiel Institute for World Economics 120
12. David Young, DG ECFIN 126
13. Thomas Zwick – ZEW Mannheim 128
56EXECUTIVE SUMMARY
This document is an extension and partial update of a previous report on the role of investment in
human capital as part of a growth-promoting strategy (de la Fuente and Ciccone (D&C), 2002). Its focus
is narrower than that of the earlier study. It concentrates on the measurement of the economic returns to
schooling in the member countries of the European Union, both from a private and from a social
perspective. It also attempts to draw some conclusions regarding the adequacy of observed aggregate
investment patterns and of private incentives for investing in education from a comparison of the
estimated private and social rates of return to schooling with each other and with those available on
alternative assets.
The results obtained in this study tend to confirm and strengthen the main conclusion of our previous
report (D&C, 2002). I find, in particular, that i) educational attainment is a key determinant of individual
earnings and aggregate productivity and has a significant effect on labour market outcomes and ii) that
human capital appears as an attractive investment relative to alternative assets, both from the individual
and from the aggregate perspectives.
Methodology
I calculate the private and social rates of return to education as the discount rates that equate the
present value of the incremental cost and income streams generated by a marginal increase in the
schooling of a representative individual for each country to whom I attribute the observed average levels
of attainment and either wages or productivity. To quantify the contribution of schooling to individual
wages and to aggregate productivity levels and growth rates, I use microeconometric estimates of
Mincerian wage equations for EU countries and the results of cross-country growth regressions drawn
from the literature.
While these calculations were carried out in D&C (2002) only for the case of a hypothetical average
EU country, the present rep