The record of sustained modern growth in real per capita income cannot be accounted for by the accumulation of conventional units of physical capital orby the increased application of hours of labor per capita [Kuznets (1966)]. 1 The sources of modern economic growth are sought instead in the changing quality of labor and capital, in the more comprehensive accounting of other inputs, and in change of organization, policy environment, or technology [Denison (1962), T.W.Schultz (1963), Kuznets (1966)]. While the issues surrounding the accounting of aggregate economic growth are unresolved and research strategies in this field remain controversial [Griliches (1970), Nelson (1981)], research on various aspects of the microeconomic relationship between education and development has expanded rapidly, forging a consensus on questions for study and appropriate methodologies to address these questions. Studies across persons, households,farms, and firms have documented, first generally in the United States and then in many low income countries, strong empirical regularities between educational attainment of populations and their productivity and performance in both
market and nonmarket (home) production activities. Microeconomic empirical studies have refined and extended this base of evidence, showing that more educated men and women receive more earnings and produce more output than do the less educated in a wide range of activities [Psacharopoulos (1985), Jamison and Lau (1982)]. If these relationships are causal, and education enhances the productivity and earnings of labor, it is not surprising that governments have been willing to expend a substantial fraction of national income on public
education; neither is it hard to understand why parents have set aside an increasing amount of their private disposable income to school their children, foregoing the productive contribution the children would have made to family income had they not attended school. This microeconomic perspective helps to explain the motivation of public groups and private individuals to supply resources to produce schooling services on the expectation that the rate of return warrants the investment. The rapid expansion in world demand for education that we have witnessed in the last three decades is, thus, broadly consistent with apparent high social and private rates of return to schooling investments. Moreover, education is widely viewed as a public good (with positive externalities),which increases the efficiency of economic and political institutions while hastening the pace of scientific advance on which ~nodern economic growth depends. Finally, education has always been valued by individuals and society as a consumption good and as a means to preserve and transfer cultural values to subsequent generations. The focus of this chapter on schooling as an investment with market returns is not intended to detract from the importance of education as a public good and as a source of consumption benefits, but rather to review how economic concepts and statistical methods have recently progressed in quantifying the roles of education in economic development.