Education Policies, Human Capital Accumulation, and Economic Growth

Abstract

This study employs an overlapping-generations model featuring public and private education to analyze whether providing child allowances and free high school education influences economic growth. Earlier studies that analyze public and private education (Glomm and Ravikumar, 1992; Cardak, 2004) do not consider models in which fertility is endogenous and individuals can simultaneously choose both public and private education. Earlier studies that consider the effect of child allowances on fertility (Groezen, Leers, and Mejidam, 2003) disregard human capital accumulation. This study assumes people can choose both public and private education simultaneously in a model in which both fertility and human capital accumulation are endogenous. It introduces both child allowances and investment in public education financed by income taxes. It further considers how raising child allowances or investing in public education affects fertility, human capital accumulation, and economic growth. This study is motivated by evidence that the burden of meeting children’s educational expenses is one reason for Japan’s declining birthrate. It analyzes whether child allowances or free high school education can increase the birthrate and promote human capital formation. We find that such policies are unlikely to promote economic growth if they are financed by income taxes that cannot be increased indefinitely.