becker lewis 1993 preview of he and economic growth

1 PREVIEW OF HIGHER EDUCATION AND

ECONOMIC GROWTH William E. Becker and Darrell R. Lewis

The role of education in the economic health of the nation and the relationship between education and economic growth are increasingly the focus of public debate. In the 1980s, the educational reform literature began warning that our nation was "at risk" because of perceived shortcomings in our educational system. Even the cover of Business Week (September 19, 1988) joined the chorus by stating that "the nation's ability to compete is threatened by inadequate investment in our most important resource: people." Although the early advocates of educational reform aimed their criticism and remedies at primary and secondary education, more recently, the role of higher education has been drawn into the debate.

This volume is intended to contribute to our understanding of the relationships between higher education and the economic growth and wellbeing of the nation. What is the role of postsecondary education in the economic development of the United States? What other relationships exist between economic growth and the research, service, and teaching missions of colleges and universities? In short, how and in what ways does higher education in the United States contribute to our nation's economic growth?

A significant amount of evidence in the economics literature indicates that an investment in higher education is beneficial both to the individual and to society in general. Our earlier edited book, The Economics of American Higher Education (1992), dealt primarily with the effects of higher education on the gains enjoyed by the individuals. Here, we focus

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W. E. Becker et al. (eds.), Higher Education and Economic Growth© Springer Science+Business Media New York 1993

2 HIGHER EDUCATION AND ECONOMIC GROWTH

on the gains to the nation as a whole. What follows is an overview of each of the chapters in this volume and a summary from the literature on the relationships between higher education and national growth.

Recognition of Education's Contribution to National Income

The notion that an investment in education and human capital promotes economic growth can be traced to Adam Smith (1776) in his famous study on what constitutes the "wealth of nations," although in his earlier and less well-known work Smith questioned the merits of public education. 1

Not until after World War II, however, did studies attempt to directly link investment in education with incremental gains in national income.

In the 1960s, the seminal work of Becker (1960, 1964), Schultz (1961), and Denison (1962) cast light on how, and to what extent, education contributes to the enhanced productivity of the labor force and, in turn, to growth in national income. These important findings have led to hundreds of subsequent studies on the economic value of all forms of education and training, including higher education. For a more detailed discussion of the many issues related to the economics of education, the reader should consult the excellent textbook by Cohn and Geske (1990) and the edited volume by Psacharopoulos ( 1987). Here we will concern ourselves almost exclusively with the role of postsecondary education in economic growth.

The contribution of extended education (after high school) to economic growth is presumed to occur through a number of distinct yet interacting functions. First, it is believed that higher education contributes to economic growth through the production of knowledge and that this largely takes place within the major universities through faculty members' and their advanced students' research and creative activities. Second, it is generally acknowledged that colleges and universities contribute to national growth through the diffusion of knowledge, which may result from the external service activities of their faculty, staff, and students. Finally, it is universally accepted that postsecondary institutions contribute to the transmission of knowledge through extensive and varied teaching activities. Economists have focused their attention on this latter set of activities as measured by enrollments, man-years of postsecondary education completed, number of graduates, graduation rates, expenditures, and changes in student earnings.

Curiously, smug scholars tend to emphasize only the creation of knowledge as their contribution to the nation's well-being, while eschewing the importance of their teaching in the advancement of economic growth.

PREVIEW OF HIGHER EDUCATION 3

Scholars typically give little thought to the importance of the service function of their college or university. On the other side of the equation, however, a significant portion of postsecondary demand can be attributed to the "consumption" interests of the student and the surrounding community in which the institution is located. That is, the personal satisfaction that the college or university "customers" derive from learning, entertainment, culture, and group activities associated with college life may not be trivial.

There is little debate, however, that the primary reason why individuals undertake extended education and training in postsecondary instruction is an investment in self improvement. 2 Economists typically emphasize the screening and human capital value of instructional activities and their ability to increase the future earnings and productivity of the existing student body. Education, by its nature as an investment, has a delayed effect on the growth in national income. Attempts to measure the contribution of education to national growth have tried to capture this investment effect either by a comparison of the ex post financial rates of return associated with alternative levels of education, or the ex post change in productivity measures assigned to education within an aggregate production function, or, more recently, the rate of productivity growth convergence among countries with similar educational characteristics.

Rates of Return for Higher Education

The determination of how much a society should spend on roads, law enforcement, or education would be easy if the benefits that society can expect in return for an investment in these infrastructure components could be accurately calculated. Although numerous economists have attempted to determine the social rate of return to educational expenditures, estimates have been viewed with skepticism by both policy makers and the authors of the studies.

There is no question that education benefits the individual student, in terms of both immediate satisfaction and future options and earning possibilities. Education also benefits society above and beyond the private benefits enjoyed by the individual receiving the education: education enables the recipients to become more informed voters, more adaptable to change, more sociable, more equal, more cultured, etc. These added benefits provide the justification for government subsidies to education. At least conceptually, the value of the added benefits plus the value of the private benefits define the social return to education. But there is no general agreement on what are the added benefits of education and how


to measure them. Nonetheless, economists have tried with some success, especially in the area of evaluating the effect of education on productivity that accrues to society in addition to the return enjoyed by the individual recipient of the education.

When the private return to education is expressed as a percentage of the expenses incurred by the individual (and his or her parents), the resulting percentage is called the private rate of return. Similarly, when the social return to education is expressed as a percentage of the expenses incurred by all of society, it is called a social rate of return. Estimates of the rates of return to various education levels across both developed and developing countries have been summarized and reported by Psacharopoulos (1989) and Jain (1991) among others. The results, with respect to higher education, show a fairly consistent pattern across time, countries, and stage of development.

The private and social returns to higher education are generally lower than those to other levels of education, but still above many other rates of return obtainable on alternative forms of physical capital investment. The private returns to education are generally higher than social returns at all levels of education. This disparity is especially pronounced at the postsecondary level within poor countries where the subsidies provided directly to students (for example, grants and loans) and indirectly through government aid to the institutions (tuition subsidies and other legislative appropriations) are easy to measure, but added benefits are few or difficult to measure. During the late 1970s and early 1980s, for example, the social rate of return to higher education averaged about 9 percent in advanced countries, 13 percent in Asian countries, and as high as 16 percent in Latin America. At the same time, the private rates of return to higher education were about 12 percent in advanced countries, 18 percent in Asian countries, and as high as 32 percent in Africa (Psacharopoulos 1987, p. 586).

The observation that in developing countries the social and private rates of return to higher education have historically been below both the social and private rates of return for precollege education has led to the belief that there is overinvestment in higher education because of oversubscription and oversubsidization. Within advanced and developed countries, the observation of Freeman (1976, 1980) and others that returns to higher education were falling also led to the popular idea that there had been an "overinvestment" in higher education.

If private returns to higher education are artificially high, brought about by the overly large subsidies to higher education, then there will be excessive private demand. There also will be increased political pressure


for even greater subsidies and an ever increasing impetus to expand higher education in the public sector well beyond the point where it has a net social benefit or any real impact on growth. 3 According to the overinvestment hypothesis, to the extent that subsidized private demand for higher education takes resources away from other investments with higher rates of return, higher education actually may be detracting from the nation's growth. Especially in the case of developing countries, investment in higher education is alleged to slow general economic growth as more productive investments elsewhere are foregone.

To further argue against expanding higher education, the observations by Freeman (1976, 1980) and others in the 1970s that both the social and private rates of return to higher education were falling were used as evidence that higher education needed to be curtailed. Even if social and private returns were brought in line, the fact that both were falling was used as a signal that private and societal funds were better invested where returns were rising. In the 1980s, however, higher education continued to expand in developed countries, such as the United States, as well as in developing countries, such as those in Asia. Did this expansion of higher education detract from or enhance economic growth? Are social rates of return for higher education above or below other alternative forms of investment, and to what extent is this comparison relevant? Does investment in higher education detract from other forms of investment? To what extent is the provision of high skill and technical training, which typically yields a low social rate of return because of the high costs of instruction, necessary for economic growth?

Essentially, five countervailing responses have been put forward in the consideration of these questions and against the argument of overinvestment in higher education. First, recent estimates of current and projected returns for higher education in the United States are not low. Evidence by Berger (1988), Murphy and Welch (1989) and others indicates that the returns to higher education reversed their downward trends and began to rise rapidly in the late 1970s and early 1980s. Becker (1992) provides data on incomes received by those with college and high school educations. His calculations (as reprinted here only for males in table 1-1) suggest that returns to higher education may have hit a relative maximum in 1986, although the ratio of incomes of college to high-school educated is still in excess of its previous cyclical high reached in 1970.4

Second, others (Cohn and Geske 1990; Denison 1962; and Miller 1967) have argued that since expenditures on education (by both governments and individuals) are made largely at the expense of consumption and not savings, such expenditures do not necessarily detract from other physical


Table 1-1. Median Income of Twenty-five-to Thirty-four-Year-old Males with College Education or four Years of High School, with Income in Years 1963 to 1990

College High School Years (4+ yrs.) (4yrs.) Ratios

1963 6947 5612 1.24 1964 7397 5933 1.25 1965 7474 6151 1.22 1966 8373 6600 1.27 1967 8762 6882 1.27 1968 9264 7402 1.25 1969 10228 8008 1.28 1970 10661 8217 1.30 1971 10908 8556 1.27 1972 11751 9316 1.26 1973 12349 10153 1.22 1974 12637 10701 1.18 1975 13232 10767 1.23 1976 13965 11416 1.22 1977 14802 12104 1.22 1978 15783 13129 1.20 1979 17345 14280 1.21 1980 18773 15181 1.24 1981 20589 15393 1.34 1982 21149 15298 1.38 1983 21988 15789 1.39 1984 23687 17030 1.39 1985 26174 16981 1.54 1986 27141 17551 1.55 1987 28181 18366 1.53 1988 28288 19650 1.44 1989 29663 20167 1.47 1990 29568 20051 1.47

Source: See William E. Becker, Why Go To College? The Value of an Investment in Higher Education, in W. Becker and D. Lewis (Eds.), The Economics of American Higher Education, Kluwer Academic Publishers, Chapter 4, 1992, for data obtained from the U.S. Bureau of the Census. Current Population Reports, Series P-60, Money Income of Households, Families, and Persons in the United States, various issues.

capital formation and growth. As a consequence, additional expenditures on education can make a net contribution to growth even if the social rate of return might be lower for education than for physical capital.


Third, still others point out that the efficient system for college loans in the United States has facilitated market efficiencies that narrow the differences between alternative rates of return, thereby justifying investment in human capital. Recent work with field-specific rates of return (Berger 1988, 1992) indicates that enrollment patterns in specific fields of study within higher education reflect their changing market rates of return and that students are sensitive to these changing rates (Catsiapis 1987). Looking at aggregate rates of return overlooks these more meaningful microeffects. Many argue that where systems of public higher education are well developed, and financial markets permit borrowing against future earnings, rates of return on education will, in the long run, tend to equal the rates of return on other productive assets. But whether or not ex post observations on rates that cannot be measured precisely will ever show equality in a rapidly changing environment is open to debate.

Fourth, because educational expenses are measured in monetary terms, they are sensitive to the economic conditions of the country in which the education takes place. Educational costs tend to rise quickly with the wealth of the country. They also tend to rise more rapidly than the general rate of inflation within the country. Because the delivery of education is human capital intensive, physical capital technological developments occurring elsewhere in the economy are not easily implemented in education. Technological advances drive down relative prices in the sectors where these advances can be implemented. Within these innovating sectors, wages can rise even though product prices and the cost per unit of output are falling. Because the cost of labor tends to move uniformly with average productivity across the economy, the cost per unit of output and the relative price of the output will rise in the sectors that cannot implement the new technologies. Thus, the apparent social rate of return to education may fall as its price (tuition and fees) rise even though the driving cost increases had little to do with the quality of education or its actual contribution to the overall growth process. Baumol, Blackman and Wolff (1989, chapter 9) refer to this phenomenon as the "cost disease" of education.

Finally, as pointed out by Baumol et al., the cost disease phenomenon is insensitive to the contribution that education is making to the innovations taking place in the other sectors. Ironically, the education industry, and higher education in particular, may be the least able to implement the technologies that it is helping to create and disseminate. The research and development aspect of higher education, as well as the more universal instructional and service functions, contain factors that are not amenable to technological improvements. Yet, as the United States and other


advanced countries become more and more reliant on technological change and high-tech related activities, education has provided the means and is typically required for rapid implementation across other sectors of the economy. At a minimum, high schools and all of higher education provide the complementary skill and technical training required in the use of modern technology. Thus, the contribution of higher education in promoting growth is even stronger if the complementarities between higher education and other forms of investment are taken into account. Studies by Griliches (1969), Fallon and Layard (1975), and most recently Baumol, Blackman and Wolff (1989) have shown that primary level education is not enough to foster and maintain economic growth. Their work suggests that increased investment in new plants and equipment for the production of new products contributes to national growth only to the extent that human capital exists to identify and facilitate implementation of this capital. Unfortunately, the description of the actual manner in which education contributes to human capital formation, to make it complementary with physical capital, is more stylistic than scientific fact. Nonetheless, given that much of the recent technological change and new capital formation in the United States has come about in high-tech and related industries, it is not unreasonable to assert that higher education has played a major part in facilitating the implementation of this new capital within the U.S. economy.

Although it is possible to have too much investment in certain forms of education, especially within higher education, as it is also possible to have too much investment in certain types of plant and equipment- this does not necessarily imply that all of higher education is overextended within the United States. In the development of higher education policy, especially national policy targeted on economic growth, care must be taken to examine the effects of differing types and forms of extended education and training.

Growth Accounting for Higher Education

Growth accounting is based on the concept of an aggregate production function that links output to various forms of inputs. Patterned after the early work by Kendrick (1961) and Denison (1962, 1967), most studies of the contribution of education to aggregate economic growth start with a production function in which the total economy's output of goods and services, 0 (measured by gross domestic product), is produced on a fixed amount of land by the inputs of labor, L (measured by total person hours


worked), and physical capital, K (measured by inventories of machines and equipment). In functional notation,

0 = f(L,K)

Angus Maddison (1987, p. 653) states that "the oldest index of productivity growth is that for labor productivity, TI," which he defined as the difference between the compound rate of increase in output, 0, and the rate of increase in labor, L,

TI(L) = o - L, where the dots over the variables indicate percentage changes. Similarly, productivity growth associated with increases in capital is defined by

n(K) = o- L. These measures of productivity do not show the same patterns over time. Indices of labor productivity tend to be positive throughout the business cycle, while indices of capital productivity tend to move with the business cycle, being negative in recessions. Allowing for these changes in both labor and capital productivity gives rise to the total factor productivity approach

TI(L,K) = o - cxL - (1-cx)k,

where ex is the fraction of national income paid to labor, which under the assumptions of perfect competition and constant returns to scale, is constrained to equal one minus the factor share going to capital. The early work of Douglas (1948), for example, placed ex at 0.75.

Because the total factor approach accounted for less than half of the U.S. growth, researchers introduced the "augmented" and "supplementary" factor approaches to take account of improvements in educational attainment and other factors such as changes in the age-sex composition of labor and changes in economic structures. Again, in the notation of Maddison,

TI(L*, K*, S) = 0- cxL*- (1-cx)k*- S, where S stands for factors other than augmented labor, L *, and capital, K*, that are believed to influence growth. Dots over the variables again indicate percentage changes and the asterisks indicate multiple component terms. Maddison identifies nine structural changes that are reflected in S, while augmented capital K* includes adjustments for new technologies and depreciation. In the case of labor, L * stands for two components of labor: the number of workers times their average hours of work and the number of years of schooling completed by the labor force.


As an example of how growth accounting is used, consider the work of Smith and Welch (1986) that shows a one year increase in schooling to be associated with 6.5 percent increase in income. From this value King and Smith (1988, pp. 35-36) argue that 21 percent of the 1940-1980 growth in economy-wide U.S. income growth (of 2.4087 percent) resulted from an increase in average schooling levels (of 3.09 years for whites) during this period. Thus, they conclude that only 1.9029 percent of the income growth during this period can be attributed to factors other than education.

Pencavel (1991), in his work on the role of education in economic growth, demonstrates how the contribution of the different levels of schooling (primary, secondary, and higher education) can be derived from aggregate measures of the schooling and productivity. Working with: Maddison's indices of average years of schooling of the populations in the United States, United Kingdom, Japan, France, and the Netherlands; Maddison's measure of the contribution to output growth of schooling in those six countries; and Maddison's estimate of ex equal to 0.70, Pencavel calculated higher education's contribution to output growth for three time periods between 1913 and 1984. His estimates, as provided in his chapter in this volume, indicate that although the contribution of overall schooling rose from 14.78 percent to 23.41 percent, the growth in higher education and its relative contribution to economic growth in the United States was much larger. Pencavel estimates that the contribution of higher education to economic growth has increased dramatically in this century, rising from only 1.29 percent in the 1913 to 1950 period to 14.61 percent in the 1973 to 1984 period.

Although the technique of growth accounting provides insight into the contribution of education, the technique is not without its critics. Plant and Welch (1984), for example, argue that growth accounting methods may not be appropriate for assessing the contribution of intermediate inputs in production. Education is embodied in the primary input of labor (and physical capital); it uses resources that enhance the labor even though this resource use is not directly observable in the goods and services produced. Thus, an adjustment for alternative uses to which these resources could have been put should be made in accounting for the determinants of growth. Also lacking is a positive adjustment for the contribution that education makes through other intermediate inputs such as health and longevity (Hicks 1980), and the diffusion of ideas (Ruttan 1984)- none of which is reflected in aggregate output measures.

Stephen Hoenack also calls into question the macrogrowth accounting method in his chapter (2) in this book that deals with "Higher Education and Economic Growth." He recommends approaches that are based on


individual and firm specific microdata. He feels that more prom1smg research avenues for linking higher education with growth can be found in an examination of those who actually create technological change, especially through the roles of scientifically trained personnel in the supply of innovations and in facilitating adjustments to the disequilibria created by innovations. Hoenack also argues that the scientific and technical personnel of universities could significantly increase their contributions to growth, if given appropriate incentives.

Contributions of Knowledge Production and Dissemination

Although the growth accounting methods of Kendrick (1961), Denison (1967) and those that followed, including the many rates of return studies, shed light on the relationship between human capital and economic growth, the question persists in political debates as to whether, and how, the infrastructure of higher education actually contributes to the economy. One of the problems in assessing the contribution of higher education to economic growth is that rates of return and growth accounting methods of measurement both tend to ignore the important contributions that the infrastructure of higher education makes to economic growth beyond the directly enhanced value of human capital through education and training. Further confounding our understanding of the contribution of higher education to growth is the reality that higher education both influences and is influenced by economic development.

The input of education in production is measured typically by the number of people who complete a given number of years of schooling or college. Unfortunately, this measure ignores the quality of such education and it does not take account of the many other contributions and services performed by higher education. In addition to embodying current knowledge in students, some institutions of higher education create new knowledge. Jaffe (1989), for example, reports on the relationship between research and development activities in universities and those in private industries. A new component or product that might come out of a university lab (such as the development of fluoride in Crest toothpaste at Indiana University, or the invention of Gatorade at the University of Florida) or a new forecasting method or software routine that might be part of the work of an academic economist (such as Bill Greene's academic work with the LIMDEP and ET programs at New York University leading to the founding of Econometric Software, Inc.) creates jobs,


increases wealth, and clearly contributes to national economic growth. The direct contribution of such products is easy to see.

Although many advances in efficiency appear to come from sources outside the educational establishment (as in the creation of Apple Computer), most high-tech research and development (R&D) is typically associated in one way or another with higher education. In the case of the drug industry, for example, it was the creation of the National Center for Supercomputer Applications at the University of Illinois that enabled more than forty scientists from Eli Lilly & Company to obtain supercomputer training that just a few years earlier was not available because of lack of computer power and human know-how (as reported in The Wall Street Journal, August 14, 1990). In robotics, it was the joint pioneering work at Bell Laboratories and leading U.S. research universities, including the Massachusetts Institute of Technology and the University of California at Berkeley, that gave rise to micromachines that are the size of a human hair (as discussed in Business Week, August 27, 1990).

Higher education also adds directly to allocation efficiency (Schultz 1975). Capital-skill complementarity is well known in the economics literature (Griliches 1969). Recent work presented by Bartel and Lichtenberg (1988) and the earlier literature reviewed by Jamison and Lau (1982) suggest that more educated individuals are better able to absorb new information, take initiative, and adopt new technologies. 5 Thus, the effects of expenditure on higher education can be expected to be reflected in more than just the numbers of students admitted, enrolled, or graduating and the private returns they may receive.

Regardless of the source, as the economy grows and incomes rise, the demand for enrollment places and other educational services can be expected to increase in differing areas. In addition, as new methods and technology are accepted by industry (as with the computer and information revolution of the past ten years), students quickly get the message that related educational skills are desirable; schools respond by offering that which students demand. These signals are transmitted in a market economy by earnings and income differentials attached to specific jobs and skill bundles. These income premiums are typically associated with individuals with more years of schooling and those in the fastest growing industries where the new methods and technology are being implemented.

The question of whether expenditures on public education contribute more to the nation's productivity and growth than other public expenditures is examined in this book by David Aschauer in his chapter, "Is Public Education Productive?" (see chapter 4). His work illustrates the tradition


of using macromodels to address this type of question. He does this through the development of an aggregate production function model for estimating the correlation between public spending on education and national productivity levels for a large sample of market -oriented economies over the period from 1960 to 1985. The results are consistent with the notion that variations in per capita output can be largely explained by variations in physical capital and educational capital stocks relative to output. His results indicate further that the implicit share of educational capital in output is in the range of 15 percent to 20 percent, which is consistent with the results from growth accounting discussed earlier.

In addition to its effect on the infrastructure of the economy, the contribution of higher education to basic and applied research is reflected in patents, journal articles, and new products. But, there is no precise way to relate these measures to the actual advances in productivity or reductions in costs. In "The Contribution of Higher Education to R&D and Productivity Growth" Walter McMahon (see chapter 5) addresses these measurement issues by defining an overall conceptual framework estimating the contributions, not only of the human capital formed through investment in higher education, but also of investment in academic research to labor productivity growth. Empirical estimates are presented from his model for the United States and ten other OECD countries that suggest substantial contributions.

The work of Bartel and Lichtenberg (1987) and Dickens and Katz (1987) suggests that the wages of the highly educated are higher in industries that engage in research and development activities and show rapid technological advancements. The demand for college educated labor appears to move with economic growth and technological advances. Although Pencavel (1991) states that the manner in which highly educated labor relates to advances in physical capital (machines and equipment) is questionable, Hamermesh (1986) believes that the evidence solidly supports the idea that skilled labor and physical capital are complements, while unskilled labor and physical capital are substitutes in production. That is, an increase in the demand for physical capital should be associated with an increase in the demand for college educated workers relative to those with less education.

Wayne Howe reports in his chapter on "The Effects of Higher Education on Unemployment Rates," (see chapter 6) that education has become an increasingly important criterion for job market success over the past two decades. Howe concentrates on the relationship between the changing demographic composition and education level of the labor force and the


impact of these factors on the structural rise in unemployment in the United States. The primary focus is on how the labor market adjusted to the increased supply of relatively young, inexperienced, and well-educated workers. It is shown that the labor market's response to the rising education level of an expanding labor force was a relative weakening position of employment for high school graduates, compared with those from higher education. 6

The importance of knowledge production and dissemination through education is further suggested by Baumol, Blackman and Wolff (1989) in their study of the rise and fall of nations based on productivity. They found that countries that exploit the technological advances of other countries form a "convergence club" in which those who lag in productivity at any given time tend to catch the leaders as time passes. 7 Countries with like educational levels were shown to converge among themselves, in terms of real gross domestic product, though not catching up with countries whose educational levels were higher (pp. 205-206). This convergence effect was argued to be most pronounced when secondary education was viewed as the explanatory variable. Their finding has implications contrary to that emanating from the rate of return estimates, where the primary levels had the highest social rates of return. Apparently, an emphasis on primary schooling is not sufficient if a nation wants to enhance its use of modern technology in advancing its economic growth.8 Many of the issues and the work of other economists working on education's contribution to aggregate growth convergence and technology transfer are addressed by Pencavel in this volume (see chapter 3).

As state governments across the United States have become increasingly focused on economic development strategies, one of the questions often raised is what effect state expenditures on higher education might have on business and job creation. Bryan Jones and Arnold Vedlitz directly address this question in their chapter dealing with "Higher Education, Business Creation, and Economic Growth in the American States" (see chapter 8). Presenting data from states in a cross-sectional disequilibrium adjustment model for the period 1979-1984, they report that higher education policies (that is, relative to expenditures) in the states do, indeed, influence the net creation of new business, although they acknowledge the ever-present problem of establishing one way causality. They also present evidence indicating that business creation is a critical stimulant in the economic growth process, affecting job growth while job growth fails to stimulate business growth. They conclude that state spending on higher education, not the level of state spending nor the level of federal research dollars flowing to states, may be the most important factor affecting state economic


development. The work of Jones and Vedlitz also raises the question of whether states that focus resources on their flagship universities fare better than those employing more of a scattershot approach to higher education.

The Effect of Higher Education Quality on Growth

As is evident in the topics addressed in this volume, much of the economics research in higher education to date has emphasized the quantity of human capital embodied in the population and its relationship to productivity and economic growth. As a consequence of this perceived relationship, and our continuing social concerns for equity, much of public policy during the past forty years has been aimed at facilitating expanded access for ever-increasing members of society. The often overlooked issue in these public policy discussions has been the tradeoff between quantity and quality. Is it appropriate, for example, to expand access to advanced levels of education regardless of the quality of the experiences provided? Although this issue has received some attention in the plans of developing countries (Psacharopoulos and Woodhall 1986), surprisingly little concern has been given to the qualitative aspect of higher education in the United States, where it is estimated that higher education participation rates are almost twice those in most other industrialized countries (World Bank 1982).

In the case of education, generally, Hanushek (1986, 1989) argues that expenditures on things such as lower class size, teachers' salaries, and other measures of input quality have little effect on output, when measured by test scores. Card and Krueger (1990, 1991), however, show that when the output measure is postschool earnings, expenditures on quality matter greatly. The influence of input expenditures on the relative earnings of blacks versus whites is reviewed by Donohue and Heckman (1991).

Lewis Solmon and Cheryl Fagnano address the issue of the "Quality of Higher Education and Economic Growth in the United States" in their chapter (7) for this volume. After examining the evidence on several of the issues relating to the measurement of outcomes and quality in higher education, Solmon and Fagnano conclude that the quality of higher education and economic growth are indeed highly correlated. Their work supports the notion that the distinctive quality of colleges and universities plays a significant role in our nation's economic growth.

The chapters presented in this volume suggest important ways through which higher education interacts with other sectors of our economy in the promotion of national economic growth. They also point to import-


ant directions in which public policy can be employed to maximize the social returns that accrue to a nation that has a well developed higher education sector.

Notes

1. In 1759 Adam Smith published The Theory of Moral Sentiments, in which the wrote:

The education of boys at distant great schools, of young men at distant colleges, of young ladies in distant nunneries and boarding-schools, seems in the higher ranks of life to have hurt most essentially the domestic morals, and consequently the domestic happiness, both of France and England ... Surely no acquirement which can possibly be derived from what is called a public education can make any sort of compensation for what is almost certainly and necessarily lost by it (pp. 363-364).

2. Astin, Green, Korn, and Schalit (1985, p. 47) report that 72 percent of the students in a national survey of college freshman agreed that "The chief benefit of a college education is that it increases one's earning power;" 83 percent listed "get a better job" as a very important reason for attending college. Similarly, Willis and Rosen (1979) found the decision to go to college is highly sensitive to monetary considerations, with a ten percent increase in starting salaries inducing almost a twenty percent increase in college enrollments.

3. Pressure to expand higher education that has little social benefit will be extremely pronounced if a college degree is used as a screening device for the ranking and identification of job applicants. It will also be great in selected areas of study where the private returns are great but the social returns are low because of the high cost of training.

4. In assessing the human capital enhancing effect of education, labor economists emphasize the ratio of earnings of those with a college versus a high-school education. Income figures include earnings as well as other forms of revenue. To the extent that a college education also affects one's ability to manage the sources of all investments, the college/high school ratio of income might be viewed as a better measure of the overall benefit of college. Of course, if those who pursue college educations have greater endowments initially, then the college/high-school ratio of income will be a biased measure of the overall benefit.

5. An interesting question seldom asked is whether a society can overinvest in education in the sense that the resulting technology transfer is too fast for the realization of expected profits at the time of the investment. That is, if an innovation can be copied by a highly educated pirate before the inventor realizes his or her profit then has society overinvested in education?

6. Simple college-high-school earnings differentials and rates of return to schooling that have no adjustment for labor force participation, are biased. Educational attainment increases the likelihood of being employed at any given time and it also increases the likelihood of working longer hours. For more evidence of this relationship see Mincer (1991).

7. Baumol (1991) reviews his work, Barro's (1991) work and that of others on the implications of different measures of convergence. Although countries that are part of the convergence club will have growth rates that tend to move toward the same long-term level, Baumol identifies many "ancillary variables" that may influence growth. Baumol attaches little importance to headline grabbing events such as "brain drains," "technology thefts,"


"job exporting," and the like. Articles such as "Buying the American Mind: Japan's Quest for U.S. Ideas in Science, Economic Policy and the Schools," Chronicle of Higher Education (December 11, 1991)-which reports on a study claiming that universities in the United States arc subsidizing economic progress in Japan through their research that is partially supported by Japanese interests-typically miss the shared growth that is enjoyed by all members of the convergence club.

8. Baumol, et al. 1989, cite W. Arthur Lewis for the observation that

unless a country hopes to become involved in extensive research and development and innovation, only a relatively small group of persons with a university education is needed to permit the import and adoption of more sophisticated production techniques. It is the group of trained and skilled technicians that is absolutely required in large numbers, and for them secondary education is usually indispensable (p. 202).

Nevertheless these highly skilled workers typically have some postsecondary training that may not be captured in the Baumol, ct al. empirical work. In his chapter, Pencavel argues that the results of Baumol, et al., actually indicate that an increase in enrollment rates in postsecondary education is associated with higher economic growth than the same increase in secondary school enrollment rates.

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