Human Capital Investment: The Returns from Education and Training to the Individual, the Firm and the Economy

This paper provides a non-technical review of the evidence on the returns to education and training for the individual, the firm and the economy at large. It begins by reviewing the empirical work that has attempted to estimate the true causal effect of education and training on individual earnings, focusing on the recent literature that has attempted to control for potential biases in the estimated returns to education and training. It then moves on to review the literature that has looked at the returns from human capital investments to employers. Lack of suitable data and methodological difficulties have resulted in a paucity of studies that have carried out sound empirical work on this issue. In the final part of the review, we look at the work that has tried to assess the contribution of human capital to national economic growth at the macroeconomic level. This work has generally involved using either a ‘growth accounting’ theoretical framework or ‘new growth’ theories. Although the empirical macroeconomic evidence that accompanies this work does not generally allow one to distinguish between the two approaches, there is a substantial body of evidence on the contribution of education to economic growth. JEL classification: J24, J31, O47. All the authors are at the Institute for Fiscal Studies. Blundell, Meghir and Sianesi are also in the Department of Economics at University College London. This survey is based on the draft report prepared for the DfEE Skills Task Force (Blundell et al., 1998), which contains full details of all studies reviewed here. The authors are grateful for the comments and suggestions of Roger Weller of the DfEE and two anonymous referees. The usual disclaimer applies.