Can high-income countries maintain a human capital steady state while others are catching up? A 2-region general equilibrium analysis of education and competitiveness

After impressive increase in participation and attainment in the 20th Century, a sense of disillusion has taken root in parts of Europe and N-America as to the effectiveness of formal education for social and economic advancement. For example, Goldin & Kats (2009) note that education attainment has stopped growing in the U.S.A. for the first time in a century. A similar status quo can be observed in the United Kingdom, where participation in higher education has stagnated and a large share of each cohort receives no post-compulsory education or training. Furthermore, this is compounded by an increasing scarcity of “learning on the job” opportunities for school leavers. What are the economic implications for those countries that have decided not to increase investment in skills, but simply maintain the current stock? From a conventional growth accounting approach, maintaining the stock should be sufficient to maintain current output levels. However, simultaneously, other countries are increasing their investment in education. For example, South Korea’s participation rate in higher education is nearly twice that of the OECD average. Under these circumstances a simple trade model would suggest that a country with a static human capital stock, trading in a World economy where stocks are increasing, faces declining export prices and hence worsening terms of trade. How big is this effect and how long does it take to materialise?These questions are addressed using a simple 2-region general equilibrium model for the UK and the Rest of the World (ROW). Human capital stocks are compiled for each region and projected based on current attainment rates. These are used to calibrate effective labour supply shocks for each region and simulate their economic impact. Sensitivity analyses are conducted around alternative human capital projections and trade elasticities.Ex ante I expect the qualitative result that the UK economy will shrink, while other parts of the World improve their competitiveness. However, neither the magnitude nor time profile of this development are clear ex ante. Furthermore, the results are likely to be sensitive to the assumptions adopted in the human capital projections and the elasticity of substation in trade, a parameter for which available evidence gives some range.