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Trang 3The Pennsylvania State University The Graduate School
College of the Liberal Arts
Trang 4UMI Number: 3020491 ® UMI UMI Microform 3020491
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Trang 5We approve the thesis of Tin-Chun Lin Date of signature UA ‘ oN & | ( (| 0 | Eric W Bond Professor of Economics Thesis Advisor Chair of Committee baker Lt eed é //zz JoKn H Riew /Professor Emeritus of Economics Petrolia Gfu fe Be-Yan Roberts Associate VN of Economics &¿/IH/Ð/ Findeis
ssociate Professor of Agricultural Economics
(Oros€ onl dh Robert C Marshall ` elites
Professor of Economics
Trang 6Abstract
The main purpose of this thesis is to learn the relationship among education, productivity, income distribution, and economic growth, as well as to link the structure of the educational system to the economic and social character of the society Therefore, two essays are presented in this thesis
Trang 7The second essay, which is presented in Chapter 3, investigates the effects of investment in education and the role of technical progress on economic growth in Taiwan over the period of 1964-2000 A complementarity test is also provided in the study A number of recent studies have examined the effects of education on economic growth either theoretically cr empirically, such as Tallman and Wang (1994) For this reason, I do not only modify their empirical model, but also extend the work Most importantly, I apply a general form of a structural earnings function to a measure of human capital and use a transcendental production function in the model Hence, the educational variable is measured as the average number of years of formal education per person of the labor force Moreover, I decompose the economic growth in Taiwan during the period of 1965-2000 into its proximate sources and obtain the percentage of distribution for technical progress, capita!, labor, and education As a result, I find that education provides a positive and significant effect on output growth in Taiwan, but the role of
technical progress does not appear to be extraordinarily important In addition, a further
study and explorations are supplied to investigate whether capital and education are complements Similarly, I investigate whether education and technical progress are also complements However, I find that there is no significant relationship between physical
Trang 8Table of Contents List of Figures List of Tables List of Charts Acknowledgments Chapter | Introduction References
Chapter 2 The Impact of Parental Choice in Educational Investments on Income Inequality and Endogenous Growth
2.1 Introduction
2.2 The Basic Theoretical Framework
2.3 Equilibrium under the Public Education Regime 2.4 Equilibrium under the Private Education Regime
2.5 Equilibrium under the Mixed Education Regime of Public & Private 2.6 Determination of Income Inequality and Economic Growth
2.7 Simulation 2.8 Conclusion References
Trang 103.3 The Production Function and Data Measurement 3.3.1 The Production Function
3.3.2 Data Measurement 3.4 Empirical Analysis and Results
3.4.1 Empirical Results
3.4.2, Additional Variables -College Graduates
3.4.3 Construction of Educational Indexes
3.4.4 Further Exploration
3.5 Sources of Economic Growth in Taiwan 3.6 Further Studies -Complementarity Test 3.6.1 Capital-Education Complementarity 3.6.2, Education-Technical Progress Complementarity 3.7 Conclusion References Chapter 4 Conclusion
Appendix A; Proofs of Propositions | and 2
Appendix B: The Glomm and Ravikumar Model (1992) Appendix C: Tables
Appendix D: The Cointegrating Regression Durbin- Watson Test
Appendix E: Test of Constant Returns to Scale Appendix F: The Lagrange Multiplier (LM) Test
Trang 12vil
Trang 14viii
List of Figures
Figure 2.1: Preferred Tax Function 14
Figure 2.2: Indifference Curves for Public and Private Education 21
Figure 2.3: The Decision Function 23
Figure 2.4: Log-Hunan Capital Distribution 24
Figure 2.5: Cumulative Function of Log-Human Capital 24
Figure 2.6: Tax Function 24
Figure 2.7: The Function of a Child’s Human Capital in the Mixed Education Regime
of Public and Private 26
Figure 2.8: The Distribution of Human Capital in the Period of t 31 Figure 3.1: % Distribution of Agricultural Output 48 Figure 3.2: % Distribution of Industrial Output 48
Figure 3.3: % Distribution of Service Output 48
Figure 3.4: Real Growth Rate for Agricultural Output 49
Figure 3.5: Real Growth Rate for Industrial Output 49 Figure 3.6: Real Growth Rate for Services Output 49 Figure 3.7: Average Years of Education Per Person Among Employed People
in Taiwan 54
Figure 3.8: Annual Growth Rates for Real GDP in Taiwan 54 Figure 3.9: Annual Growth Rates for Capital in Taiwan 54
Figure 3.10: Annual Growth Rates for Labor in Taiwan 55 Figure 3.11: Annual Growth Rates for Average Education in Taiwan 55
Trang 16Figure 3.12.1: Autocorrelation Function for Log(Y) Figure 3.13: First Difference of Log(Y)
Figure 3.13.1: Autocorrelation Function for First Difference of Log(Y)
Figure 3.14: Second Difference of Log(Y)
Trang 18Table 2.1: Table 2.2: Table 2.3: Table 2.4: Table 3.1: Table 3,2: Table 3.3: Table 3.4: Table 3.5: Table 3.6: Table C.1 List of Tables O= 3, B= 1, d= 0.5,a=2 8= 3, 8= 0.99, d= 0.5,a=2 9=3,/0=0.9,á=9.5,a= 2 8= 3,/8=0.5,=0.5,a= 2
Estimates of InY,, In¥, -In¥_j,and(inY, —In¥_,)-(n¥_, -In¥_,) Estimates of In¥, —InY_, (with College Graduates)
Estimates of In¥, — In ¥_, (with Indexes 1-3)
Estimates of In((P’ /P.)y/ ) _ in(( P!,/P_.)y, )
Average % of Distribution of Economic Growth in Taiwan
Estimates of In ¥ — In ¥._, ( Complementarity Test )
1: Total Factor Productivity Growth Hong Kong Table C.1.2: Total Factor Productivity Growth Singapore Table C.1.3: Total Factor Productivity Growth South Korea Table C.1.4: Total Factor Productivity Growth Taiwan Table C.1.5: Dual Total Factor Productivity Growth
Table C.2 1: % Distribution of GDP by Activities Table C.2.2: Real Growth Rate of GDP by Activities
Trang 20Table C.2.6: Investment Rate
Table C.2.7: % Distribution of Employed People by Education Attainment Table C.2.8: Expenditure on Exports and Imports in Taiwan
Table C.2.9: Overseas Chinese and Foreign Investment Table C.2.10: Number of College Graduates by Major Fields
Trang 22xH
List of Charts
Trang 24xi
Acknowledgments
I wish to express my gratitude to my advisor, Professor Eric Bond, for his insightful support and guidance to my dissertation and his encouragement throughout my graduate studies I would like to thank the members of my dissertation committee,
Professors John Riew, Bee-Yan Roberts, and Jill Findeis, for their careful readings and helpful comments I also thank Professors Beth Ingram, B Ravikumar, Edward Coulson,
and Priyanka Pandey for very helpful discussion and advice
Completing this work would not have been possible without the generous support and constant encouragement of my parents and sisters They deserve all of my gratitude
This thesis is dedicated to my parents, who have endured more, encouraged more, suffered more, and supported more than anyone since early in my life Finally, | would
Trang 26Chapter 1 Introduction
The essential intention of this thesis is to understand the importance of human capital investment in economic development It is obvious that people acquire skills and knowledge, but it is not obvious that skills and knowledge are a form of capital As
Schultz (1961) noted, “It has been widely observed that increases in national output have been large compared with the increases of land, man-hours, and physical reproducible capital Investment in human capital is probably the major explanation for this difference.” Uzawa (1965) and Rosen (1976) also stressed the important role of human
capital accumulation in driving economic growth Thereby, human capital has become a major source of social-economic development
Economics is the study of choice, and education is the augmentation of the stock
of skills and knowledge Therefore, the economics of education concerns the manner in which choices affecting this stock are made Since education has been treated as an investment good, education becomes an important determinant of life-cycle earnings,
distribution of income, and economic growth In addition, educational systems more often than not reflect the essential nature of society Education can also influence the
future shape and direction of society For this reason, it is necessary and important to built a link among educational investments, income inequality, and economic growth, as well as to connect the structure of the educational system to the economic and social
Trang 28This thesis is organized into two self-contained essays on human capital investment and its relationship with income distribution and economic growth The first essay, which is presented in Chapter 2, is theoretical analysis and focuses on the impact of parental choice in educational investments on income inequality and endogenous
growth The importance of this issue in the first essay is to learn how an educational system affects economic growth and income distribution The information will aid the government as it formulates policy on educational investments The first essay
investigates the equilibrium levels of public and private education in a model where public and private education can exist at the same time Majority voting determines the level of funding for public education, and high-income households may choose to purchase private education if the level of public funding is too low
Recently, a number of studies have analyzed how the heterogeneous access to
human capital across individuals of a same generation can affect the dynamics of
inequality and growth, according to the particular system of education For example, Glomm and Ravikumar (1992) examined the implications of public and private investment in human capital on growth and the evolution of income inequality in an economy The outstanding features of their model are that human capital endowments
are asymmetrically distributed across individuals born on the same date, as well as that human capital accumulation is governed by a dynamic form
However, Glomm and Ravikumar ignored the importance of social externalities
Trang 30reason, Ï modify the model of Glomm and Ravikumar (1992) and extend their work Three differences exist between my model and their model: preferences, technologies, and a mixed equilibrium It should be pointed out that considering social externalities is
important because externalities result in a spillover effect of human capital Due to this
effect, above-average human capital agents earn a smaller rate of return on human capital
investment than below-average human capital agents
By extension, { develop a regime where public and private education coexist, and determine a threshold level of human capital to endogenize the choice of education This
result is predominantly different from Glomm and Ravikumar’s result In their model,
they proposed a way to endogenize the choice of educational regime, which is to go via majority voting In each period, the old generation decides by majority vote whether the
educational system should be private or public Nevertheless, in reality, both public and
private educational systems exist simultaneously in a society
The results of the first essay show that there is no possibility of the collapse for the public education system; however, the private education system will collapse in the
long run if human capital grows faster in the public education sector than in the private
education sector In addition, income inequality declines over time, and a heterogeneous
Trang 32In Chapter 3, the second essay, I turn my attention to an empirical study that
examines the effects of investment in education and the role of technical progress on
Taiwan’s economic growth during the period 1964-2000 The importance of this issue in the second essay is the information provided on whether education in Taiwan has a positive and significant effect on economic growth, as well as whether technical progress plays an important role in Taiwan’s economic development A few recent empirical studies have investigated the effects of education on economic growth, such as Tallman and Wang (1994) The distinguishing features of their empirical model are their incorporation of human capital proxies and labor to form an effective labor input, as well as showing that the performance of the growth model in Taiwan is amended by
combining a labor quality index into the labor input Although Tallman and Wang showed that effective labor is a useful augmentation of the raw labor measure used in empirical growth studies, there is an alternative way to improve the performance of the empirical growth model For that reason, [ modify Tallman and Wang's (1994) empirical model by applying a structural earnings function to a measure of human capital and using a transcendental production function Three main differences exist between my model and their model: the measure of human capital, the construction of production function, and the creation of educational indexes In addition, I not only modify their empirical model, but I also extend their work As the extension, [ create three education indexes in
Trang 34Furthermore, the role of technical progress in economic growth is another
important issue in Chapter 3 Productivity has played a key role in the past growth of output in developed countries such as the U.S Nonetheless, several studies have shown
that this is not appropriate to newly industrializing countries in East Asia (i.e., Hong Kong, Singapore, South Korea and Taiwan) Therefore, | show how to ascertain the role
of technical progress in Taiwan’s economic development | not only estimate the
technical progress, but I also decompose the economic growth in Taiwan during the
period 1965-2000 into its proximate sources and obtain the percentage of distribution for technical progress
If education provides a positive and significant effect on Taiwan’s economic
growth, it is possible that capital and education are complements as well as technical
progress and education are complements A complementarity test is provided to show
whether this is so
The results of the second essay show that education provides a positive and significant effect on output growth in Taiwan, but the role of technical progress does not appear to be extraordinarily important However, there is no significant relationship
between physical capital and education as well as between education and technical
Trang 36References
Glomm, Gerhard, and B Ravikumar, “Public Versus Private Investment in Human
Capital: Endogenous Growth and Income Inequality,” Journal of Political Economy, 1992, pp818-34, Rosen, S, “A Theory of Life Learning,” Journal of Political Economy, v.84, 1976, S45- S67 Schultz, Theodore, “Investment in Human Capital,” American Economic Review, March 1961, ppl-16
Tallman, Ellis W and Ping Wang, “Human Capital and Endogenous Growth Evidence from Taiwan,” Journal of Monetary Economics, 1994, pp101-24
Uzawa, H., “Optimal Technical Change in an Aggregative Model of Economic Growth,”
Trang 38Chapter 2
The Impact of Parental Choice in Educational Investments on Income Inequality and Endogenous Growth
2.1 Introduction
Several recent studies have applied endogenous growth models to examine the impact of public educational policy on growth, income inequality, and welfare In this chapter, | modify the model of Glomm and Ravikumar (1992) and extend their work This essay examines the equilibrium levels of public and private education in a model in which public and private education can exist at the same time Majority voting
determines the level of funding for public education, and high-income households may choose to purchase private education if the level of public funding is too low
Three differences exist between my model and the model of Glomm and
Ravikumar (1992): preferences, technologies, and a mixed equilibrium First, | replace
the future consumption and the quality of school in the preferences of their model by the
current consumption and the child’s human capital in the preferences of my model
Second, I consider social externalities toward accumulating human capital in the
Trang 40develop a regime in which public and private education coexist, and determine a threshold level of human capital to endogenize the choice of education
It should be pointed out that social externalities play a key role in my model,
because they result in a spillover effect of human capital; another term is a neighborhood effect If we do not consider social externalities, we may ignore the spillover effect of human capital unless you isolate yourself and think that your neighbors’ children
absolutely will not affect your child, For example, if you live in a nice neighborhood, and
your neighbors’ children are well educated by their parents, it is reasonable to assume
that your child will not become a bad child However, if you live in a lousy neighborhood, and your neighbors’ children are not well educated by their parents, it is possible that your child might learn something bad from your neighbors’ children The key role of the spillover effect of human capital is to speed up declining income
inequality Without this spillover effect, income inequality would not decline over time, especially in the private education regime
In the past decade, economists tumed to the endogenous growth model which
emphasizes the role of human capital and externalities in determining the growth of per
capita income, such as Romer (1986), Lucas (1988), Azariadis and Drazen (1990), and Tamura (1991) In recent studies, endogenous growth models have been applied to