The system-wide impacts of the social and private market benefits of higher education on the Scottish economy : an illustrative "micro-to-macro" approach

The private market benefits of education, i.e. the wage premia of graduates, are widely studied at the micro level, although the magnitude of their macroeconomic impact is disputed. However, there are additional benefits of education, which are less well understood but could potentially drive significant macroeconomic impacts. Following the taxonomy of McMahon (2009) we identify four different types of benefits of education. These are: private market benefits (wage premia); private non market benefits (own health, happiness, etc.); external market benefits (productivity spillovers; and external non-market benefits (crime rates, civic society, democratisation, etc.). Drawing on available microeconometric evidence we use a micro-to-macro simulation approach (Hermannsson et al, 2010) to estimate the macroeconomic impacts of external benefits of higher education. We explore four cases: technology spillovers from HEIs; productivity spillovers from more skilled workers in the labour market; reduction in property crime; and the potential overall impact of external and private non-market benefits. Our results suggest that the external economic benefits of higher education could potentially be very large. However, given the dearth of microeconomic evidence this result should be seen as tentative. Our aim is to illustrate the links from education to the wider economy in principle and encourage further research in the field

The external benefits of higher education

The private market benefits of education are widely studied at the micro level, although the magnitude of their macroeconomic impact is disputed. However, there are additional benefits of education, which are less well understood. In this paper the macroeconomic effects of external benefits of higher education are estimated using the “micro-to-macro” simulation approach. Two types of externalities are explored: technology spillovers and productivity spillovers in the labour market. These links are illustrated and the results suggest they could be very large. However, this is qualified by the dearth of microeconomic evidence, for which we hope to encourage further work

The importance of graduates to the Scottish economy : a “micro to macro" approach

There have been numerous attempts to assess the overall impact of Higher Education Institutions on regional economies in the UK and elsewhere. There are two disparate approaches focussing on: demand-side effects of HEIs, exerted through universities’ expenditures within the local economy; HEIs’ contribution to the “knowledge economy”. However, neither approach seeks to measure the impact on regional economies that HEIs exert through the enhanced productivity of their graduates. We address this lacuna and explore the system-wide impact of the graduates on the egional economy. An extensive and sophisticated literature suggests that graduates enjoy a significant wage premium, often interpreted as reflecting their greater productivity relative to non-graduates. If this is so there is a clear and direct supply-side impact of HEI activities on regional economies through the employment of their graduates. However, there is some dispute over the extent to which the graduate wage premium reflects innate abilities rather than the impact of higher education per se. We use an HEI-disaggregated computable general equilibrium model of Scotland to estimate the impact of the growing proportion of graduates in the Scottish labour force that is implied by the current participation rate and demographic change, taking the graduate wage premium in Scotland as an indicator of productivity enhancement. We conduct a range of sensitivity analyses to assess the robustness of our results. While the detailed results do, of course, vary with alternative assumptions about future graduate retention rates and the size of the graduate wage premium, for example, they do suggest that the long-term supply-side impacts of HEIs provide a significant boost to regional GDP. Furthermore, the results suggest that the supply-side impacts of HEIs are likely to be more important than the expenditure impacts that are the focus of most “impact” studies

The regional economic impact of more graduates in the labour market: a “micro-to-macro” analysis for Scotland

This paper explores the system-wide impact of graduates on the regional economy. Graduates enjoy a significant wage premium, often interpreted as reflecting their greater productivity relative to non-graduates. If this is so there is a clear and direct supply-side impact of HEI activities on regional economies. We use an HEI-disaggregated computable general equilibrium model of Scotland to estimate the impact of the growing proportion of graduates in the Scottish labour force that is implied by the current participation rate and demographic change, taking the graduate wage premium in Scotland as an indicator of productivity enhancement. While the detailed results vary with alternative assumptions about the extent to which wage premia reflect productivity, they do suggest that the long-term supply-side impacts of HEIs provide a significant boost to regional GDP. Furthermore, the results suggest that the supply-side impacts of HEIs are likely to be more important than the expenditure impacts that are the focus of most HEI impact studies

Human capital in economic development: from labour productivity to macroeconomic impact

Micro-econometric evidence reveals high private returns to education, most prominently in low-income countries. However, it is disputed to what extent this translates into a macro-economic impact. This paper projects the increase in human capital from higher education in Malawi and uses a dynamic applied general equilibrium model to estimate the resulting macroeconomics impact. This is contingent upon endogenous adjustments, in particular how labour productivity affects competitiveness and if this in turn stimulates exports. Choice among labour market assumptions and trade elasticities results in widely different outcomes. Appraisal of such policies should consider not only the impact on human capital stocks, but also adjustments outside the labour market

The returns to education: a review of the empirical macro-economic literature

The idea of positive educational externalities is that the benefits of individually acquired education may not be restricted to the individual but might spill over to others as well, accruing at higher aggregation levels, in particular at the macro-economic one. We offer an extensive summary and a critical discussion of the empirical literature on the impact of human capital on macro-economic performance, with a particular focus on UK policy. Key findings include: (1) Taking the studies as a whole, there is compelling evidence that human capital increases productivity. Although there is an important theoretical distinction between the augmented neo-classical approach and the new growth theories, the empirical literature is still largely divided on whether the stock of education affects the long-run level or growth rate of the economy. A one-year increase in average education is found to raise the level of output per capita by between 3 and 6 percent according to augmented neo-classical specifications, while it would lead to an over 1 percentage point faster growth according to estimates from the new-growth theories. (2) Over the short-run planning horizon (4 years) the empirical estimates of the change in GDP for a given increase in the human capital stock are of similar orders of magnitude in the two approaches. (3) The impact of increases at different levels of education appear to depend on the level of a country’s development, with tertiary/higher education being the most important for growth in OECD countries. (4) Education is found to yield additional indirect benefits to growth (in particular, by stimulating physical capital investments and technological development and adoption). More preliminary evidence seems to indicate that type, quality and efficiency of education all matter for growth. The most pressing methodological problems are the measurement of human capital; systematic differences in the coefficient of education across countries (in particular between developing and developed countries) and reverse causality. We also make recommendations for future research priorities

Employment incentives and the disaggregated impact on the economy. The Italian case

Over the past two decades, the Italian labour market has undergone a number of profound changes. A thorough analysis of these changes shows that there has been a progressive employment polarisation, although with a very peculiar dynamics. While employment did grow in high-skill and low-skill occupations, and it shrank in the medium-skill ones, these changes did not take place simultaneously, as polarisation assumes. Moreover, wage polarisation is hardly observable in the same period. Quite differently, Italy has been characterised by relatively low or even declining returns to education along with progressively decreasing wages in the low-skill segment of the labour market. In this context, we study the potential of an employment incentive policy, for which we imagine two options, one targeting workers in high-skill and the other in low-skill occupations. The objectives of the policy are enhancing aggregate employment and improving working conditions (wages) either in high-skill or low-skill occupations, depending of the option. For the simulation of the two policy options, we employ an integrated model that combines a macro disaggregated and multisectoral Computable General Equilibrium (CGE) model with a micro-simulation model. While the CGE model evaluates how the macroeconomic shock reverberates on the labour demand at industry level, the micro-simulation model computes how the changes in macroeconomic variables affect households\u2019 decisions in terms of labour supply and final consumption

Higher Education and Economic Development in Africa: a Review of Channels and Interactions.

While the numbers with completed tertiary level education are low in Africa, both relative to other countries and in absolute terms, they have been growing very rapidly. Three questions are addressed in this paper. The first is how higher education links to other forms of capital accumulation in a process that leads to economic growth. The second is how higher education links to job outcomes in particular the role of the public sector and self-employment as outcomes for graduates. The third is whether and how an expansion of skilled jobs can create its own demand. The paper draws on both macro and micro evidence to answer those questions which are placed in a long run historical context. It is argued that growth has been more closely linked to investment in physical capital than in education and this may well reflect the fact that education is most valuable when it is linked to technology which requires higher skills. Data from thirty two African countries are used to show that the returns to education, measured both by macro production functions and by micro earning functions, are highest for those with higher levels of education. A contrast is drawn between the role of higher education in providing access to public sector employment and the increasing importance of self-employment in Africa. The paper concludes by asking whether Africa can use its investment in higher skilled labour to effect a service based growth revolution.

Why do South Korean firms produce so much more output per worker than Ghanaian ones?

The labour productivity differentials between manufacturing firms in Ghana and South Korea exceed those implied by macro analysis. Median value-added per employee is nearly 40 times higher in South Korea than Ghana. The most important single factor in explaining this difference is the Mincerian return to skills which differ by a factor of three between Ghana and South Korea. There is no significant difference in total factor productivity across the countries once we allow for human capital. Our results are consistent with those who have argued that rises in the return to education within developed countries can be explained by skill-biased technical progress in those economies. They are also consistent with work in developing countries which finds a convex return to education based on individual labour market data. Allowing for differences in the shape of the relationship between productivity and human capital across countries is crucial for understanding the role of human capital in increasing productivity.African and Asian manufacturing, productivity, efficiency, human capital.