Matching Up the Data on Education with Economic Growth Models

Abstract

Abstract The growth literature has not yet fully established how data on educational attainment should be introduced in theories involving human capital. This paper examines alternative specifications of human capital within the Mincerian class that once incorporated in standard growth models may generate predictions that match up with the existing data on education. First, we analyze predictions in the Bils and Klenow (2000) model and show that although they behave correctly under some parameterizations, they are also subject to some shortcomings. Next, we present a standard neoclassical two-sector growth model that adopts a human capital specification in which the fraction of individual's time endowment in school is viewed as an investment rate. We show that the optimally chosen educational attainment predicted by the calibrated model does not correspond to the data as it is unrealistically high. Finally, we propose an alternative specification of human capital based on a law of motion of educational attainment that successfully matches up with the data.