ERI Discussion Paper Series No.55
Education and growth

May 1993
Dale W. Jorgenson
(Harvard University)
Barbara M. Fraumeni
(Northeastern University)


The purpose of this paper is to describe the impact of investment in education on U.S. economic growth. Beginning with the seminal contributions of Becker (1964), Mincer (1974), and Schultz (1961), economists have found it useful to characterize the benefits of education by means of the notion of investment in human capital.1 This idea captures the fact that investment in human beings, like investment in tangible forms of capital such as buildings and industrial equipment, generates a stream of future benefits. Education is regarded as an investment in human capital, since benefits accrue to an educated individual over a lifetime of activities.

One of the most important benefits of education is higher income from participation in the labor market. This increase in income is the key to understanding the link between investment in education and economic growth. People differ enormously in effectiveness on the job. Substituting more effective for less effective workers increases output per worker. More highly educated or better trained people are more productive than less educated or poorly trained people. However, education and training are costly, so that substitution of people with more education and training requires investment in human capital.

The most common approach to compiling data on educational investment is to measure the inputs, rather than the output, of the educational system.2 Data on the expenditures of educational institutions for teachers and other personnel, buildings and equipment, and materials can be compiled from accounting records. This information can be supplemented by estimates of the value of time spent by students (and their parents) as part of the educational process. Costs of schooling and the value of the time spent by students can be used to measure the flow of resources into schools and universities.

While the costs of education are highly significant in economic terms, the cost-based approach to measurement of educational investment ignores a fundamental feature of the process of education. This is the lengthy gestation period between the application of educational inputs-mainly the services of teachers and the time of their students-and the emergence of human capital embodied in the graduates of educational institutions. Furthermore, some of the benefits of investment in education, such as greater earning power, are recorded in transactions in the labor market, while others - like better parenting or more rewarding enjoyment of leisure - remain unrecorded.3

We need a measure of output to put the education industry on par with other industries producing goods and services. This measure must reflect the fact that education is a service industry, but its product is investment in human capital. Since the effects of formal schooling endure through the lifetime of an educated individual, we employ the impact of education on an individual's lifetime income as a measure of educational output. A second important idea is that education enhances the value of activities outside the labor market, such as parenting or the value of leisure time. Our estimates of the output of the education sector incorporate the value of time spent outside the labor market.

In measuring investment in education our first step is to compile data on the economic value of labor market activities. In Section 2 of the paper we show that the constant dollar value of time spent working has doubled in the postwar United States. The growth of this value has been greater or the decline has been less for women than for men at all levels of educational attainment. This reflects the rapid increase in labor force participation by women relative to men. The proportional increase in the value of market labor time has been greatest for college educated men and women. This corresponds to the substantial growth in level of educational attainment.

Our second step in measuring investment in education is to estimate the value of nonmarket labor activities. These include time spent in investment in education as well as time spent in the consumption of leisure. We infer rates of compensation for nonmarket activities assigned to consumption from market wage rates. The value of these nonmarket activities, measured in this way, exceeds the value of market activities, primarily because nonmarket time exceeds time in the labor market. However, the value of nonmarket labor activities has grown more slowly. The expansion of the value of nonmarket time has been more rapid for men than for women. We discuss these findings at greater length in Section 2.

In Section 3 of the paper we estimate lifetime labor incomes for all individuals in the U.S. population. These incomes include the value of both market and nonmarket labor time. We then estimate the impact of increases in educational attainment on the lifetime incomes of all individuals enrolled in school. We find that investment in education, measured in this way, is greater in magnitude than the value of working time for all individuals participating in the labor force. Furthermore, the growth of investment in education has exceeded the growth of market labor activities during the postwar period. Investment in education has increased much more rapidly for women than for men, especially at the college level.

In Section 4 of the paper we measure the effects of changes in the educational composition of the labor force on the growth of the noneducation sector of the economy. This sector includes business, government enterprises, and general government, but excludes private and public educational institutions. We present a new measure of changes in the quality of hours worked. This measure is based on the impact of substitution among workers with different characteristics - including age, sex, and education - on labor input per hour worked. We identify the growth of labor quality with an increase in the proportion of more highly trained and better educated workers.

Second, we measure the inputs of the education sector, beginning with the purchased inputs recorded in the outlays of educational institutions. We also measure the inputs of time for all students enrolled in formal education. A major part of the value of the output of educational institutions accrues to students as increases in their lifetime incomes. Treating these increases as compensation for student time, we can evaluate this time as an input into the educational process. Given the outlays of educational institutions and the value of student time, we can allocate the growth of investment in education to its sources.

Finally, we aggregate the growth of education and noneducation sectors of the U.S. economy to obtain a new measure of U.S. economic growth. This includes the growth of the business and government sectors, as measured in the U.S. national income and product accounts. It also includes the growth of the educational sector, as measured by our new data on investment in education. Combining these measures of output growth with the corresponding measures of input growth, we obtain a new set of accounts for the growth of the U.S. economy. In these accounts the scope of output is increased by investment in education and the scope of input is increased by the value of student time.

We present the conclusions of our study in Section 5. Our most important finding is that investment in human and nonhuman capital accounts for the largest part of U.S. economic growth during the postwar period. This finding characterizes the noneducation sector of the U.S. economy as well as the economy as a whole, including the education sector. Since 1973 the growth rate of the U.S. economy has slowed by almost four-fifths of a percentage point, relative to the postwar average. A revival of U.S. economic growth will require the mobilization of increased capital and labor resources. Educational investment will continue to predominate in the investment requirements for more rapid economic growth.

1.Rates of return to investment in human capital are discussed by Becker (1964) and cohorts of the U.S. population. Murphy and Welch (1989) give estimates of rates of return for higher education. Surveys of different aspects of the literature are provided by Griliches (1977) and Rosen (1977).

2.In this context we employ the notion of "output" as the economic value produced within the educational achievement, such as performance in standardized tests. This definition is the basis for the literature on educational production functions reviewed by Hanushek (1986, 1989).

3.Nonmarket benefits of education are discussed by Haveman and Wolfe (1984) and Michael (1982).

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