Education and Economic Growth

AuthorSasha Obradovic
PositionFaculty of Economics, University of Kragujevac, Serbia
Pages377-385

Page 377

Introduction

The subject of this paper is to examine the influence and relations between human capital and economic growth. The human capital is the most important determinant of a capability of the country’s national economy to produce and acquire technological innovations, i.e. technical processes achievements. Technical process is the key element in growth decomposition. As Simon Kuznets once said, the key element for the growth of the western countries is not the material capital, but knowledge mass gained through verified research, empirical science brake throughs, as well as the population’s capacity and training to efficiently use the above mentioned knowledge (Kuznets 1955, 7).

Thus, for example, the major part of the material capital in both Germany and Japan was destroyed during the II World War. However, these economies succeeded to recover in a relatively short time because the skills, experience, education, discipline and motivation of the existing workforce remained untouched. The concept of capital is traditionally placed within the framework of the material means of production, but in this way, skills and capabilities that are justified by investing in human capital are indirectly excluded. In 1960, Theodore Shultz suggested that activities related to education and training should also be regarded as a process belonging to capital accumulation i.e. by investing into human capital which could be translated into productivity and income growth (Schultz 1961, 12).

Investment in human capital includes both tangible assets and intangible assets that are used for the purpose of improving the quality of workforce by means of healthcare, education and existing workforce skills improvement. Like any other investment, these investments also require some kind of sacrifice on the part of the individual. These individuals are, again, willing to make such kind of sacrifice if they expect to be rewarded for it in the future with, some sort of benefit. The human capital is formed, initially, by person’s education and training which in turn enables the better productivity of that individual, i.e. enables him/her to earn higher wage.

Page 378

Investment in human capital

Education is a key investment in human capital. It helps a person to achieve and apply his/her abilities and talents. In developed countries in the process of determining wages, intellectual capabilities are much more important that physical (abilities), when great majority of people is concerned. The school system in the majority of world countries is employed to essentially reproduce class structure; for example the graduates from the best schools earn significantly higher wages than those from inferior institutions. The high quality of education is the best guarantee for the capability to acquire new skills and knowledge. Precondition for investing and spending money on education and healthcare, either by a private person or by the state, rests on a belief that in this way one increases the income and productivity in the long run. The additional income and output that are produced in this way are simply the result of investment yield.

Education yield can be defined as a discrepancy between the increase in wage that one worker receives on the bases of one year of schooling compared to others. The effect of education on wages, based on a research, point to the following: yields from education are 13.4% higher per one year of schooling during the first four school years, i.e. 10.1% higher in the following four years and 6.8% higher after the completion of the eight grade (Hall and Jones 1999, 6). This means that a worker would earn 13.4% higher wage after the completion of the first year of schooling, i.e. 1.1344 times more when he/she finishes elementary school (first four grades), than a worker that has no formal education at all. If the worker completes 5 years of schooling this difference would be even greater and it would be 1.82 (1,101x1,1344) since the yield per year from the 5th – 8th grade is 10.1%. The education, thus, contributes to differentiation in wages for different individuals.

Such yield could also be measured by workforce pondering index, where the particular ponder is measured by contribution though which education influences discrepancies between wages of individuals. In order to determine and derive this index, the data on distribution of workforce per year of schooling should be collected first, as well as information on discrepancies between wages that is caused by difference in quality and duration of education. One of the assumptions related to in index derivation states that the discrepancies in wages are produced by differences in education. This approach is in some way arbitrary, because basically it is very hard to determine education yield within the proportion of wage differences.

However, economic and real yields from education can be different which results in lower yields or insufficient exploitation of human capital for the following cases:

- Quality of education during the schooling is low;

- The knowledge acquired by education process does not match the knowledge demanded by the labor market;

- Insufficient demand for human capital due to the low rate of economic growth;

- There is a relative balance in workers’ wages weather they have lower or higher qualifications, or the differences are so small that the motivation for additional investment in the quality of workforce decreases;

Considering the number of completed school years (defined by school years or by the highest level achieved), as a rule, the employees’ wages increase till the maximum level, which is usually reached at the age of 40 or after; and it is only then that wages stabilize or possibly decrease. For those who have higher education wage curve is higher and the increase phase is sharper compared to those who have lower wages and have started their working career earlierbut whose educational level is lower. Those who have higher educational level reach their maximum wage later, but then again they have higher pension compared to those who have lower level of education.

Page 379

The education itself if followed by two types of costs: implicit and explicit. Implicit costs are related to loss of wages during the studies, which would have been otherwise earned if...

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