Edited by Neri Salvadori and Arrigo Opocher
Chapter 7: Education and Poverty in a Solow Growth Model
* Thomas Bassetti 7.1. INTRODUCTION In macroeconomic literature, education is considered one of the most important inputs to produce human capital, which can be defined as: ‘the stock of accumulated skills and experience that make workers more productive’ (Stiglitz and Boadway, 1994). A common assumption in the theory of economic growth is that human capital is produced under constant returns to scale, using education as a single input. Yet there is no compelling evidence to support this assumption. On the contrary, an increasing number of analyses show that the production of human capital exhibits increasing returns to scale for low levels of education and decreasing returns to scale for high levels of education. For instance, Krueger and Lindahl (2001) find evidence in favour of an inverted U-shaped relationship between the stock of human capital and the GDP growth rate. By comparing different regression models, they find that the best fitting of the data is provided by a regression model that considers a quadratic form for education. The inverted U pattern suggests that social returns to schooling are increasing only for countries with a low level of education (below 7.5 average years of schooling), while for countries with high levels of education (above 7.5 average years of schooling) social returns to schooling are decreasing. In analyzing the effect of human capital in an open economy, Isaksson (2002) confirms Krueger and Lindahl’s result concerning the existence of a non-linear relationship between education and economic growth. By introducing a measure for trade openness, Isaksson...
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