On the Role of Education and Training as Drivers of Growth

Abstract

The paper studies the contribution of human capital on economic growth through its impact on the rate of innovation by formulating an endogenous growth model that combines elements from Romer (1990), Aghion and Howitt (1992), and van Zon and Yetkiner (2003). Using a relatively broad concept of human capital that includes not only formal education but also on-the-job training, the article addresses two main issues. The first one is the optimum provision of firm-specific training necessary to be able to adopt and adapt to new technologies. The second one is the impact of both formal education and on-the-job training on the innovative capacity of an economic system that is the ultimate cause of output growth. In our set-up, general education enhances R&D activities and lowers adjustment costs to new technologies, thus facilitating their adoption, while on the other hand learning and firm-specific training ensure the possibility to implement the new coming technologies and reap all the related future profits. In the first part we assume that the adoption of a new technology consists of two periods, i.e. the learning phase during which newly hired workers acquire the right amount of know how in order to become familiar with the specific new technology, and a production phase in which profit flows arise for firms and in which the cost savings can be realized that arise from productivity increases in the learning phase. By expanding the training phase, entrepreneurs run a greater risk of shortening the production phase for a given arrival rate of new technologies that progressively erode the profit flows obtained from existing technologies. The paper shows first that it is possible to find an optimum, endogenously determined, amount of firm-specific training, that depends on the individuals’ speed in skills acquisition and educational attainment. Thus, a situation in which better educated workers may be disproportionately selected for training issues is possible, especially in times of rapid technological change. However, the paper also shows that an increase in the formal level of education can even result in a reduction of growth because of the increase in ‘technology absorption costs’ in terms of output foregone during re-training spells that arrive at a faster rate. In addition, the paper shows how to calculate the optimum endogenous taxation rate in order to cover the educational expenditures while ensuring the maximum growth rate of innovations. The results achieved finally offer some interesting hints from an education policy perspective.education, on-the-job training, human capital, endogenous growth, wear and tear effect