Paper #942

Title:

Education, growth and income inequality

Authors:

Coen Teuling and Thijs van Rens

Date:

January 2001 (Revised: July 2006)

Abstract:

Estimates of the e¤ect of education on GDP (the social return to education)have been hard to reconcile with micro evidence on the private return. We present a simple explanation that combines two ideas: imperfect substitution between worker types and endogenous skill biased technological progress. When types of workers are imperfect substitutes, the supply of human capital is negatively related to its return, and a higher education level compresses wage di¤erentials. We use cross-country panel data on income inequality to estimate the private return and GDP data to estimate the social return. The results show that the private return falls by 2 percentage points when the average education level increases by a year, which is consistent with Katz and Murphy's [1992] estimate of the elasticity of substitution between worker types. We find no evidence for dynamics in the private return, and certainly not for a reversal of the negative e¤ect as described in Acemoglu [2002]. The short run social return equals the private return.

Keywords:

Growth, inequality, education, private and social return to schooling, compression effect

JEL codes:

E24, J24, O15

Area of Research:

Macroeconomics and International Economics

Published in:

Review of Economics and Statistics, Vol. 90 (1), pp. 89-104. February 2008

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