Working Paper

The Augmented Solow Model with Mincerian Schooling and Externalities

Kiel Working Papers, 1408

We combine the augmented Solow model with the Mincer equation to derive a specification

that identifies an education externality within a production function framework. The previous

empirical literature has not reached a consensus about the size of the education externality,

which is given by the difference between the microeconomic and the macroeconomic return

to education. Relative to our benchmark value that is based on a parameterization of the

derived specification, we find that the estimated education externality is too large when the

empirical model is not properly restricted, and appears to be absent when all control variables

of the empirical model are properly accounted for. We note that the absence of an education

externality would be inconsistent with observed levels education subsidies.


Kai Carstensen
Erich Gundlach
Susanne Hartmann


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