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