Board of Governors of the Federal Reserve System International Finance Discussion Papers Number 550 May 1996 ALTERNATIVES IN HUMAN CAPITAL ACCUMULATION: IMPLICATIONS FOR ECONOMIC GROWTH

This paper demonstrates that considering alternative means of human capital accumulation, such as learning-by-doing, overturns the presumption that formal education is unconditionally bene ̄cial for economic growth. It analyzes a model in which the average level of human capital creates externalities in future human capital accumulation and individuals can augment their human capital with work experience or education. The model shows that in the early stages of development, education enhances growth by creating a positive externality, and, in later stages, it may depress growth by leading to a negative externality. It also demonstrates the possibility of multiple equilibria in which low-income equilibria are characterized by under-education and high-income equilibria are characterized by over-education. ALTERNATIVES IN HUMAN CAPITAL ACCUMULATION: IMPLICATIONS FOR ECONOMIC GROWTH Murat F. Iyigun and Ann L. Owen