How Large Are Human Capital Externalities

Topics: Compulsory education, College, Productivity Pages: 50 (15011 words) Published: June 23, 2013
This PDF is a selection from an out-of-print volume from the National Bureau of Economic Research

Volume Title: NBER Macroeconomics Annual 2000, Volume 15 Volume Author/Editor: Ben S. Bernanke and Kenneth Rogoff, editors Volume Publisher: MIT PRess Volume ISBN: 0-262-02503-5 Volume URL: http://www.nber.org/books/bern01-1 Publication Date: January 2001

Chapter Title: How Large are Human-Capital Externalities? Evidence from Compulsory-Schooling Laws Chapter Author: Daron Acemoglu, Joshua Angrist Chapter URL: http://www.nber.org/chapters/c11054 Chapter pages in book: (p. 9 - 74)

and DaronAcemoglu Joshua Angrist
MASSACHUSETTS INSTITUTE OF TECHNOLOGY

How

Human-Capital Externalities? Evidence from Compulsory Schooling Laws Large

Are

1. Introduction
The effect of human capital on aggregate income is of central importance to both policymakers and economists. A tradition going back to Schultz (1967) and Nelson and Phelps (1966) views the human capital of the workforce as a crucial factor facilitating the adoption of new and more productive technologies (see Foster and Rosenzweig, 1996, for evidence). Similarly, many recent endogenous growth models emphasize the link between human capital and growth. For example, in Lucas's (1988) model, worker productivity depends on the aggregate skill level, whereas Romer (1990) suggests that societies with more skilled workers generate more ideas and grow faster. More generally, many economists believe that cross-country income disparities are due in large part to differences in human capital (e.g., Mankiw, Romer, and Weil, 1992). Figure 1 plots the logarithm of output per worker relative to the United States for 103 countries against average years of schooling in 1985. Consistent with this view, the figure shows a strong correlation between output per worker and schooling. In fact, the bivariate regression line plotted in Figure 1 has an R2 of 65%.1 We thank Alexis Leon, Chris Mazingo, and Xuanhui Ng for excellent research assistance, and our discussants Mark Bils and Cecelia Rouse for their comments. Thanks also go to Paul Beaudry, Bill Evans, Bob Hall, Larry Katz, Enrico Moretti, Jim Poterba, Robert Shimer, and seminar participants at the Canadian Institute for Advanced Research, the 2000 NBER Macroeconomics Annual Conference, the 1999 NBER Summer Institute, University College London, Cornell University, the University of Maryland, and the University of Toronto for helpful discussions and comments. Special thanks to Stefanie Schmidt for advice on compulsory-schooling data. 1. Data on output per worker are from Summers and Heston (1991), with the correction due to Hall and Jones (1999). Education data are from Barro and Lee (1993). See Krueger

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The line shows the fitted OLSrelationship.The slope coefficientis 0.29, and the standarderroris 0.02.

A simple calculation suggests that for, education to raise income as steeply as suggested by Figure 1, there must be large human-capital externalities. To see this, note that the private return to schooling, i.e., the increase in individual earnings resulting from an additional year of schooling, is about 6-10% (e.g., Card, 1999). If the social return to schooling, i.e., the increase in total earnings resulting from a one-year increase in average schooling, is of roughly the same magnitude, then differences in schooling can explain little of the cross-country variation in income. More specifically, the difference in average...
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