Essays on education investment income inequality and economic growth

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Higher quality 6" x 9° black and white photographic prints are available for any photographs or illustrations appearing in this copy for an additional charge. Contact UMI directly to order. ProQuest Information and Learning 300 North Zeeb Road, Ann Arbor, MI 48106-1346 USA 800-521-0600 UMI ® The Pennsylvania State University The Graduate School College of the Liberal Arts ESSAYS ON EDUCATION INVESTMENT, INCOME INEQUALITY, AND ECONOMIC GROWTH A Thesis in Economics by Tin-Chun Lin Submitted in Partial Fulfillment of the Requirements for the Degree of Doctor of Philosophy August 2001 UMI Number: 3020491 UMI ® UMI Microform 3020491 Copyright 2001 by Bell & Howell Information and Learning Company. All rights reserved.

This microform edition is protected against unauthorized copying under Title 17, United States Code. Bell & Howell information and Learning Company 300 North Zeeb Road P. Box 1346 Ann Arbor, Mi 48106-1346 We 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 AssociateVN of Economics &¿/IH/Ð/. Findeis ssociate Professor of Agricultural Economics (Oros€.

Marshall onl dh ` elites Professor of Economics Head of the Department of Economics Abstract 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. The first essay, which is in Chapter 2, examines 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, several studies have applied endogenous growth models to examine the impact of public educational policies on growth, income inequality, and welfare. | 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. As an extension, I develop a regime where public and private education coexist, and determine a threshold level of human capital to endogenize the choice of education.

Consequently, [ show that there is no possibility for collapse of 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, I find that income inequality declines over time, and a heterogeneous economy becomes a homogeneous society in the long-run. As long as income convergence exists in an economy, a balanced growth path exists in the long run. The 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 capital and education as well as between education and technical progress. Table of Contents List of Figures viii List of Tables List of Charts xH Acknowledgments xHÍ Chapter |. Introduction References Chapter 2.

The Impact of Parental Choice in Educational Investments on Income Inequality and Endogenous Growth 2. The Basic Theoretical Framework 10 2. Equilibrium under the Public Education Regime 12 2. Equilibrium under the Private Education Regime 16 2.

Equilibrium under the Mixed Education Regime of Public & Private 19 2. Determination of Income Inequality and Economic Growth 25 2. Conclusion 36 References 38 Chapter 3. The Effect of Education and the Role of Technical Progress on Tatwan’s Economic Growth: An Empirical Study 40 3.

A Brief Overview of Taiwan’s Economic Development vi 3. The Production Function and Data Measurement 50 3. The Production Function 50 3. Empirical Analysis and Results 55 3.2, Additional Variables---College Graduates 60 3.

Construction of Educational Indexes 62 3. Sources of Economic Growth in Taiwan 73 3. Further Studies---Complementarity Test 75 3. Capital-Education Complementarity 76 3.2, Education-Technical Progress Complementarity 77 3.

Conclusion 80 References 83 Chapter 4. Conclusion 85 Appendix A; Proofs of Propositions | and 2 88 Appendix B: The Glomm and Ravikumar Model (1992) 95 Appendix C: Tables 96 Appendix D: The Cointegrating Regression Durbin- Watson Test 108 Appendix E: Test of Constant Returns to Scale 109 Appendix F: The Lagrange Multiplier (LM) Test 110 Appendix G: A General Description of the Taiwan Education System Hil Appendix H: The Empirical Growth Model of Tallman and Wang (1994) 114 vil Appendix I: The Primal and Dual Approaches to Growth Accounting 11S viii 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 Figure 3.1: Autocorrelation Function for Log(Y) 67 Figure 3.13: First Difference of Log(Y) 68 Figure 3.1: Autocorrelation Function for First Difference of Log(Y) 68 Figure 3.14: Second Difference of Log(Y) 69 Figure 3.1: Autocorrelation of Function for Second Difference of Log(Y) 69 List of Tables Table 2.1: Estimates of InY,, In¥, -In¥_j,and(inY, —In¥_,)-(n¥_, -In¥_,) 70 Table 3,2: Estimates of In¥, —InY_, (with College Graduates) 7h Table 3.3: Estimates of In¥, — In ¥_, (with Indexes 1-3) 72 Table 3.4: Estimates of In((P’ /P.5: Average % of Distribution of Economic Growth in Taiwan 75 Table 3.6: Estimates of In ¥ — In ¥. 1: Total Factor Productivity Growth--Hong Kong 96 Table C.2: Total Factor Productivity Growth--Singapore 96 Table C.3: Total Factor Productivity Growth--South Korea 96 Table C.4: Total Factor Productivity Growth--Taiwan 97 Table C.5: Dual Total Factor Productivity Growth 98 Table C. 1: % Distribution of GDP by Activities 99 Table C.2: Real Growth Rate of GDP by Activities 100 Table C.3: % Distribution of GDC Formation by Selected Activities 101 Table C.4: Real Growth Rate of GDC Formation by Selected Activities 102 Table C.5: GDP and NI Per Capita at Current Prices 103 xi Table C.6: Investment Rate 104 Table C.7: % Distribution of Employed People by Education Attainment 105 Table C.8: Expenditure on Exports and Imports in Taiwan 106 Table C.9: Overseas Chinese and Foreign Investment 107 Table C.10: Number of College Graduates by Major Fields 107 Tabie C.11: Number of Graduates at All Levels 107 xH List of Charts Chart 1: Taiwan Education System Hl xi 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 like to thank Chiang Ching-Kuo Foundation. Without their financial support (Doctoral Dissertation Fellowship), [ couldn’t devote all my time to finish this dissertation.

Chapter 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 character of the society. This thesis is organized into two self-contained essays on human capital investment and its relationship with income distribution and economic growth.