Assessing education's contribution to productivity using firm-level evidence

Lara Lebedinski and Vincent Vandenberghe

No 2013017, LIDAM Discussion Papers IRES from Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES)

Abstract: There 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.

Keywords: Education; Human capital; Firm-Level Productivity and Labour Cost; Cobb-Douglas; CES; imperfect substitutability (search for similar items in EconPapers)
JEL-codes: C51 E24 J24 (search for similar items in EconPapers)
Pages: 29
Date: 2013-08-26
New Economics Papers: this item is included in nep-cwa, nep-edu, nep-eff, nep-hrm, nep-lab and nep-lma
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13)

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Journal Article: Assessing education’s contribution to productivity using firm-level evidence (2014)
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