Social Econ Blog

... an extra year of school is associated with more than a 30 percent increase in per capita income.

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One explanation for the extraordinarily strong relationship between national earnings and education is that the correlation is largely spurious.

Perhaps, richer countries choose to become more educated, so that higher income causes higher levels of education rather than the reverse. Perhaps countries with other positive attributes, like better governments, are both richer and better schooled. The individual level research has labored hard to find so-called “natural experiments” — like mandatory schooling laws that start abruptly and relatively arbitrarily in a particular year in a particular state — that enable researchers to estimate the returns to education holding individual aptitude constant. Cross-country work is not nearly as well-identified and it never will be.

Yet there are reasons to think that the education-income relationship is not mere happenstance.

Historic educational enrollments predict subsequent income growth quite well, even when holding past income constant, which seems to reject the view that education is just following income. Moreover, the link between initial education and subsequent income growth has proven to be remarkably robust, surviving any number of country-level controls, including controls for governmental quality. I’m not confident that all of the measured cross-national relationship between schooling and income is real, but more evidence supports that interpretation than any obvious alternative.

If the link between country level income and education is real, then we need to understand why the link between schooling and education gets magnified at the country level. Why should there be a social multiplier that causes the schooling-income link to increase at higher levels of aggregation?

One hypothesis is that there are spillovers from education, and that human capital enables places to gain access to better technologies. Human capital externalities occur when one person’s education makes his or her neighbors more productive. Comparing people within a country only picks up the direct effect of more education on the person being educated, and won’t reflect any of these externalities. Comparing across countries picks up all the externalities that would occur if one’s persons schooling provided benefits for everyone around.

Within the United States, researchers have found that when holding an individual’s own years of schooling constant, that individual’s earnings increase by around 9 percent as the share of college graduates in that individual’s metropolitan area increases by 10 percent. If you work around skilled people, you earn more, either because you have learned from those people or because more skilled entrepreneurs make production more efficient. After all, Buenos Aires in 1900 had significantly fewer innovative technologies than did Chicago in the same year, perhaps because of lower levels of schooling.

But country-level income and education may also be closely linked because of politics. There is a very strong correlation between quality of government and education. My work with Felipe Campante suggests that the link between Argentina’s low level of education in 1900 and its poor economic performance over the next century reflects, in part, the fact that Argentina’s lower levels of education led to worse political outcomes.

// posted by BW @ 9:45 AM