How to Model a Child in School? A Dynamic Macrosimulation Study for Tanzania

Universal primary education is regarded as one of the key pillars of sustainable development. The positive influence of education on growth is supported by many empirical studies. However, the effects of education on labour supply, poverty reduction and welfare as well as subsistence agriculture are hardly traceable in an econometric set-up, given the complex interactions and the long-term nature of education. An economy-wide dynamic simulation model provides a well-suited toolkit to analyse the effects of increased school provision in these aspects and provides insights into the intertemporal aspects of the schooling decision of children. We develop a macroeconomic model that explicitly includes education and human capital allocation, and takes into account that the possibility of child labour increases the opportunity costs of human capital formation. In an application for Tanzania, we find that a large-scale investment programme in education might have a negative effect on both gross domestic product (GDP) growth and high-skilled labour supply in the short term but leads to higher GDP and welfare as well as significantly reduced child labour supply in the medium to long term.