Macroeconomic performance and education

Macroeconomic performance and education

Literature on economic growth models explores directly the quantitative relationship between investments in education and training and the level and growth of per capita GDP. There are a large number of studies, beginning with the classical growth models first developed in the 1950s, through to the so-called endogenous growth models that are still widely applied in many current empirical studies. Both data sets and econometric modelling techniques have developed extensively over recent years and many different model specifications have been proposed and empirically tested. Typically, these models use data drawn from a cross-section of countries, sometimes only for developed countries but often for a wider set. Data difficulties commonly mean that consistent series of educational variables are hard to obtain over sufficiently long periods to facilitate econometric time series analyses. For developed countries over more recent years, cross-sectional and time series data are combined into panel sets to enable a more comprehensive testing of the relationship between human resources and economic growth. This body of research can be divided up into a number of subsections. The so-called ‘growth accounting’ literature emphasizes the importance of measuring changes in the quality of labor, as indicated by improved qualifications and higher skills, when trying to account for economic growth over the long term. The impact of the accumulation of knowledge though the undertaking of research and development (R&D) has also been a key feature of this body of research. Other subsections focus on technical research into production and related functions, which are concerned with the relationships between factor inputs (both tangible and intangible, such as knowledge) and economic outputs. The so-called ‘new growth theories’ are also very relevant here. These highlight the determinants of economic growth in the broadest sense, concentrating on human capital inputs. There are a number of distinguishing features of the new growth models, but, essentially, they extend the existing models by endorsing technological change (hence, they are also sometimes referred to as endogenous growth theories). This contrasts with traditional neoclassical models, where economic growth is driven by the increase in factor inputs (i.e. population growth) and by the exogenous rate of (labor augmenting) technological change. The newer models often allow for increasing returns to scale, where growth is unbounded and in which growth rates can continue to increase indefinitely over time.