Returns to scale in producing human capital from schooling

This study examines a crucial assumption in much of the recentwork on endogenous growth, namely, constant returns to scalein producing human capital. A simple model is constructed toshow that the returns to scale in human capital production canbe inferred from the relationship between the wage rate andyears of schooling. A large international micro dataset is usedto estimate this relationship. The empirical evidence indicatesthat human capital production displays significant increasingreturns at low levels of educational attainment, and significantdecreasing returns at high levels of educational attainment.     

Should Education be Publicly Provided?

This study suggests that a subsidy in the form of public provision has the potential to be the most efficient educational policy because it stimulates investment in human capital, which would otherwise be inefficiently low because of distortionary income taxation and possible external benefits. Moreover, it can potentially do this without grossly distorting the mix of investments in human capital. Other policies do not have the potential to achieve both these ends without introducing additional, perhaps overwhelming, problems. Thus public provision of education appears to provide incentives for human capital accumulation which are more efficient than any other feasible policy.