Education, externalities, fertility, and economic growth

The benefits of education are usually assessed by analyzing rates of return. Social rates of return reflect the fact that education may be provided free or at a subsidized price and that a part of any individual's income accrues to the state through taxation. But they typically do not include private benefits that are not directly connected with the individual's gross earnings; nor do they include the external effects of education on economic growth. Some benefits are generally omitted from calculations of social returns to education, but the estimates produced - ranging from 13 percent to 26 percent - are implausibly high. There are several reasons for this. Studies may not reflect the fact that family background influences both the likelihood of participating in education and a person's future earning power even without education. Failure to take account of the effects of quality of education may also lead to upward bias. An alternative approach is to make cross-country comparisons using macroeconomic data. A number of such studies are discussed. In assessing whether education has any external effect on economic growth, assumptions must be made about education's direct effect on earning power. Based on a conservative figure of a 5 to 8 percent increase in earnings for every year of education, there is some evidence to support the presence of a small externality, but the evidence cannot be said to be overwhelming. There is, however, much clearer evidence of a link between education and fertility rates. The effect is observed in both macroeconomic data and household studies, but is stronger in macroeconomic data for reasons that are not clear. This effect constitutes an externality that - at a time of widespread (but not universal) concern about population growth - is of great importance. The author develops a simulation model from work by Barro and Becker. The model links fertility decisions with consumption/saving decision. In this model, parents derive utility from their children's welfare; as a consequence, children are a form of saving. The model is extended to reflect education as an endogenous decision and then further to look at the effects of an external effect of education on economic growth. Simulations demonstrate that the rate of return on education relative to that on physical capital is a major influence on fertility, suggesting that the model sheds some light on education's external effect on fertility.