Chapter 8 The Social Value of Education and Human Capital

We review and extend the empirical literature that seeks evidence of a wedge between the private and social returns to human capital, specifically education. This literature has two main strands. First, much of modern growth theory puts human capital at center-stage, building on older notions of human capital externalities as an engine of economic growth. Empirical support for these ideas, based on both the comparative growth of national outputs and on the geographic dispersion of wages within countries, is meager. There is a strong association between average earnings and average education across nations and regions in the U.S. that exceeds the private returns to education. However, problems of omitted variables and endogeneity inherent in spatial equilibrium models mean that this association can hardly be understood as evidence for social returns. There is no evidence from this literature that social returns are smaller than private ones, yet neither is there much to suggest that they are larger. We then turn to the literature on job market signaling, which implies that social returns to education are smaller than private returns. Consistent with our earlier conclusions, we find scant evidence of this. We construct a model of the speed of employer learning about workers' unobserved talents, and we estimate the model using panel data on young workers. We find that employer learning about productivity occurs fairly quickly after labor market entry, implying that the signaling effects of schooling are small.