Where has All the Education Gone? Everywhere But into Growth

Pritchett (World Bank Econ Rev 15(3):367–391, 2001) asked a famous question, “Where has all the education gone?” This brought the lack of correlation between the growth in measured education and the growth in income in developing countries to broad attention. Empirical findings confirm that after World War Two, human capital-output ratios have tended to be higher in less developed countries than in developed countries. We explain this pattern using a dynamic general equilibrium model with signaling games that explicitly considers the following: (1) workers with different abilities have different costs when choosing their educational levels, (2) employers are unable to directly observe workers’ abilities, and (3) worldwide governments broadly subsidize educational expenditure. Our simulation results suggest that modeling specifications with educational pooling and public subsidies to schooling could well mimic the related features of the data, and consequently these two factors could be especially important for explaining these features even though many other potential factors could also affect both economic growth and human capital accumulation simultaneously.