Exploiting States’ Mistakes to Identify the Causal Impact of Higher Education on Growth

Abstract

Should countries or regions invest more in higher education in order to grow faster? Recent policy reports on growth and productivity in Europe versus the United States1 , for example argue that a major cause for the relatively slow growth in Europe is its underinvestment in higher education. Pre-enlargement, the European Union invested only 1.1 percent of its total annual gross domestic product in higher education compared with 3 percent in the United States. A key reason why investment in tertiary education may enhance growth is that such investments are likely to stimulate complementary investments in research and development, thereby fostering technological innovation. This explanation is consistent with panel data on American executives’tertiary education and their enterprises’investment in research and development. Scherer and Hue (1992), using data on 221 enterprises from 1970 to 1985, …nd a positive and signi…cant correlation between executives’level of technical education and spending on research and development. Of course, this correlation is no guarantee , of causality but does suggest a possible complementarity between investments in higher education and investments in research and development. This complementarity is stressed by Romer (2000),2 who argues that research and development subsidies that are unaccompanied by an increase in the supply of researchers or technicians will result in an increase in the relative price of highly educated labor but little increase in aggregate research and development and, therefore, little or no change in productivity growth.3

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