ECONOMICS OF EDUCATION: Does Education have a bearing and how does it contribute to economic growth?

CHAPTER THREE

EDUCATION AND DEVELOPMENT

3a i). Analyze the contribution of education to economic growth

The concept that investment in human capital promotes economic growth can be traced back to the time of Adam Smith and the early classical economists who stressed the importance of investment in human skills.

However, it was not until the 1960’s that scholars sought to establish the actual contribution of education to economic growth. Schultz {1961} and Denison {1962} showed that education contributes directly to the growth of national income by improving the skills and productive capacity of the labor force.

Denison’s attempt to explain U.S economic growth between 1910 and 1960 in terms of increases in labor and physical capital immediately established, however, that, there was a large “residual”  that could not be explained this way. The challenge was to discover how much of this “residual” was related to the effect of education on the quality of the labor force, and how much to other factors such as improvements in the quality of physical capital and economies of scale.

In this respect, Denison calculated that between 1930 and 1960, for example, 23% of the rate of growth of output in the United States was due to the increased education of the labor force. Similarly, Schultz’s {1963} method of measuring the contribution of education to economic growth (i.e., in terms of the rate of return to human capital, which he then compared with the rate of return to physical capital) led him to suggest, as Denison had, that a substantial proportion of the rate of growth of output in the U.S was due to investment in education.

Some of the methods that have been used to assess the contribution of education to development are:

  1. Growth Accounting Studies which estimates the contribution of economic growth in a given time period for investment in education of the labor force.
  2. Productivity Studies which estimate the contribution of additional education to the physical productivity of workers and farmers.
  3. Cost-benefit studies which evaluate the economic contribution of formal education in terms for their private costs of to her expenses incurred by students while in such public costs as the additional income earned by those who take the education.
  4. Studies which estimate women’s education’s effect on long-term and quality of life.
  5. Studies that estimate the role of education in poverty alleviation.

Results from some of these studies suggest that:

  1. Educational investment has been one of the most important factors contributing to economic growth.
  2. Expenditures on education contribute positively to labor productivity.
  3. The economic payoff to spending on education from an individual (private) and public (social) standpoint is high in absolute terms and compared with other investments.
  4. Increased education of parents especially mothers has an important impact on child health and reduced fertility at all levels of economic development.
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