1. www.skope.ox.ac.uk The contribution of higher education to economic growth Craig Holmes Higher Education and the Economy seminar 25 th November 2014

2. www.skope.ox.ac.uk Introduction “there is compelling evidence that …higher education is the most important phase of education for economic growth in developed countries.” (DES, 2004, pg. 58) How might it do this?

3. www.skope.ox.ac.uk Introduction “The capacity for systematic invention, the capacity readily to perceive and apply the results of scientific progress, and the capacity for leadership both in the fields of organisation and in the transmission and the sifting of ideas - such capacities, if they do not come solely from education at the higher stages, certainly derive in a large measure from the existence of a sufficient proportion of persons educated to this level and of institutions devoted to higher education and research (Robbins Report, p. 206)”

4. www.skope.ox.ac.uk Key terms and definitions National income = national output = national expenditure Gross domestic product (GDP): – Private consumption – Investment – Government expenditure – Trade balance GDP per capita = income per person Real vs. nominal

5. www.skope.ox.ac.uk National income Source: World Bank

6. www.skope.ox.ac.uk Economic growth Source: ONS

7. www.skope.ox.ac.uk Economic growth Source: World Bank

8. www.skope.ox.ac.uk Economic growth Source: World Bank

9. www.skope.ox.ac.uk Economic growth Source: World Bank

10. www.skope.ox.ac.uk Economic growth Source: World Bank

11. www.skope.ox.ac.uk Seminar outline 1.Economic theory on education and growth 2.Empirical analyses of education and growth – Specific studies looking at higher education 3.Problems with evidence 4.Implications for policy

12. www.skope.ox.ac.uk The production function Simple production function: Mankiw, Romer and Weil (1992): – Diminishing returns to each factor of production – α, β and γ < 1 – Constant returns to scale – α+β+γ = 1 – H = hL – A = productivity, for a given set of production factors. Captures what can’t be measured, including technological progress, resource shocks and the health of institutions

13. www.skope.ox.ac.uk Output and productivity Source: World Bank, Barro-Lee (2000)

14. www.skope.ox.ac.uk Output and productivity Source: World Bank (2000)

15. www.skope.ox.ac.uk Education and growth 1.Neoclassical growth model – Solow, 1956 (without human capital) – Mankiw, Romer and Weil, 1992 (with human capital) 2.Endogenous growth models – Spillovers from capital investment – Innovation

16. www.skope.ox.ac.uk Neoclassical growth model Economy reaches a steady state (k*): Capital stock per worker, k Investment in k = saving rate * output Replacement capital = k *(population growth + depreciation rate) k0k0 k 0 + new investment Required replacement capital new investment Saving and investment k*k*

17. www.skope.ox.ac.uk Neoclassical growth model Short run growth is driven by accumulation Long run growth at the steady state – Capital stock increases until investment = depreciation – Long run growth = technical progress

18. www.skope.ox.ac.uk Neoclassical growth model Mankiw, Romer and Weil (1992): – Both human and physical capital are accumulated – Human capital: requires investment (share of national output diverted into education and training) depreciates (skills lost if underused, or become obsolete following technical progress, or people retire) – Diminishing returns to investment  There is a steady state level of both k and h. – Once reached, long run growth depends on A.

19. www.skope.ox.ac.uk Endogenous growth Lucas (1988): – Human capital produces spillovers (onto other workers) that raise overall productivity. – If spillovers are large enough, diminishing returns to scale become constant returns i.e. double the capital stock  double output per worker – Simplify as a broad measure of capital: – No steady state

20. www.skope.ox.ac.uk Human capital and growth Broad capital stock per worker, k Investment in k = saving rate * output Replacement capital = k *(population growth + depreciation rate) Saving and investment

21. www.skope.ox.ac.uk Human capital and growth Physical capital can accumulate without bound. What about human capital?

22. www.skope.ox.ac.uk Human capital and growth Human capital in Lucas’ model is non-rival: – Investment (time spent studying) builds upon existing human capital – Can be used by everyone, including later generations – Is this a satisfactory assumption for investment in HE? Rival vs. non-rival human capital – Skills – Knowledge

23. www.skope.ox.ac.uk Empirical studies Model options: – Neoclassical / conditional steady state models (e.g. Mankiw, Romer and Weil, 1992)  saving rates for human capital and physical capital and initial income (all per capita) – Growth accounting  growth rate of human capital stock (increase in average years of education) and growth rate of physical capital stock but not initial income – Endogenous growth  absolute increase in human capital stock (initial average years of education) and (possibly) initial income – Quality vs. quantity measures (e.g. Hanuschek and Woessmann, 2007) – average performance on international tests (e.g. PISA 2006)

24. www.skope.ox.ac.uk Empirical studies What evidence supports policy claims By the time of the Dearing Report in 1997: – One cross country analysis (Gemmell, 1996, looking at 1960-1985) – “However the cross-section evidence for higher education remains limited…the robustness of these results is uncertain” (Gemmell, 1997, paragraph 3.19) By the time 2006 and 2011 reforms: – Supporting evidence from Gemmell (1996) or literature reviews which relied on it. Results that follow taken from Holmes (2013) which tests all the above model specifications

25. www.skope.ox.ac.uk Results 1: steady state

26. www.skope.ox.ac.uk Results 2: growth accounting

27. www.skope.ox.ac.uk Results 3: endogenous growth

28. www.skope.ox.ac.uk Results 4: extensions

29. www.skope.ox.ac.uk Problems with growth studies Krueger and Lindahl (2001) find numerous problems with macro growth studies: – Errors in education data – Controlling for capital – Assumptions about returns being constant across time – Causality – Other omitted variables

30. www.skope.ox.ac.uk Problems with growth studies Robustness:

31. www.skope.ox.ac.uk Comparison with other studies Aghion et al. (2009) – increases in patenting in the US can be attributed to exogenous increases in spending on four-year degree courses at research intensive universities, and subsequently economic growth. Vandenbussche et al. (2006) – link between five-year growth rates and higher education, once distance from the technological frontier is controlled for – Measure of variable: share of labour market with a tertiary education degree

32. www.skope.ox.ac.uk Comparison with other studies BIS (2013) – 15 country, EUKLEMS data, 1982-2005 – Finds a 0.2-0.5pp increase in productivity for a 1pp increase in the employment share of graduates – Possible problems: Education is only captured by graduate employment share (as with Vandenbussche, 2006) Model mixes levels (human capital) with flows (investment) Causality is overstated (for above reasons, plus reverse causation)

33. www.skope.ox.ac.uk Discussion How does this week’s material fit in / conflict with what you have studied so far? What are the policy implications?

34. www.skope.ox.ac.uk The expansion of HE in the UK

35. www.skope.ox.ac.uk The expansion of HE in the UK The occupational composition has changed in favour of graduates, but not enough Labour Force Survey, 1995-2008, 3 digit occupations: Undergraduates and post- graduates Higher (sub degree) qualificationsApprenticeships Lower qualifications Occupational composition2.9%1.1%-1.1%-2.8% Residual5.6%-1.0%-5.0%-5.5% Total change8.5%0.1%-6.1%-8.3%

36. www.skope.ox.ac.uk The expansion of HE in the UK The big questions for “high skills vision” are: 1.Do non-graduate jobs get upgraded when more graduates are available? 2.Does graduate expansion facilitate increases in demand for skills?

37. www.skope.ox.ac.uk Job upgrading Media associate professionals IT technicians Corporate managers Public service professionals Sales associate professionals Managers in agriculture and forestry Health associate professionals Therapists Legal professionals Research professionals