Assessing education's contribution to productivity using firm-level evidence
AbstractThere is plenty of individual-level evidence, based on the estimation of Mincerian equations, showing that better-educated individuals earn more. This is usually interpreted as a proof that education raises labour productivity. Some macroeconomists, analysing cross-country time series, also support the idea that the continuous expansion of education has contributed positively to growth. Surprisingly, most economists with an interest in human capital have neglected the level of the firm to study the education-productivity-wage nexus. And the few published works considering firm-level evidence are lacking a proper strategy to cope with the endogeneity problem inherent to the estimation of production and wage functions. This paper taps into a rich, firm-level, Belgian panel database that contains information on productivity, labour cost and the workforce’s educational attainment. It aims at providing estimates of the causal effect of education on productivity and wage/labour costs. Therefore, it exclusively resorts to within firm changes to deal with time-invariant heterogeneity bias. What is more, it addresses the risk of simultaneity bias (endogeneity of firms’ education-mix choices in the short run) using the structural approach suggested by Ackerberg, Caves & Frazer (2006), alongside more traditional system-generalized method of moments (GMM) methods (Blundell & Bond, 1998) where lagged values of labour inputs are used as instruments. Results suggest that human capital, in particular larger shares of university-educated workers inside firms, translate into significantly higher firm-level labour productivity, and that labour costs are relatively well aligned on education-driven labour productivity differences. In other words, we find evidence that the Mincerian relationship between education and individual wages is driven by a strong positive link between education and firm-level productivity.
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Bibliographic InfoPaper provided by Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES) in its series Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) with number 2013017.
Date of creation: 26 Aug 2013
Date of revision:
Education; Human capital; Firm-Level Productivity and Labour Cost; Cobb-Douglas; CES; imperfect substitutability;
Find related papers by JEL classification:
- J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
- E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution
- C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-08-31 (All new papers)
- NEP-CWA-2013-08-31 (Central & Western Asia)
- NEP-EDU-2013-08-31 (Education)
- NEP-EFF-2013-08-31 (Efficiency & Productivity)
- NEP-HRM-2013-08-31 (Human Capital & Human Resource Management)
- NEP-LAB-2013-08-31 (Labour Economics)
- NEP-LMA-2013-08-31 (Labor Markets - Supply, Demand, & Wages)
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