<!-- Start of picture text --> Policy Research<br>Eduoallon and Employment<br>WPS iO39<br><!-- End of picture text -->

- This paper a product of the Education and Emp'oyment Division, Population and Human Resources - Department is part of a larger effort in the depar nent to establish the linkages between human capital investments and economic development. Copies of the paper are available free from the World Bank, 1818 H Street NW, Washington DC 20433. Please contact PHREE, room S6-2 14, extension 33680 (November 1992, 51 pages).

The benefits of education are usually assessed by analyzing rates of return. Social rates of return reflect the fact that education may be provided free or at a subsidized price and that a part of any individual's income accrues to the state through taxation. But they typically do not include private benefits that are not directly connected with the individual's gross eamings; nor do they include the external effects of education on economic growth.

Some benefits are generally omitted from calculations of social retums to education, but - the estimates produced ranging from 13 - percent to 26 percent are implausibly high. There are several reasons for this. Studies may not reflect the fact that family background influences both the likelihood of participating in education and a person's future eaming power even without education. Failure to take account of the effects of quality of education may also lead to upward bias.

An altemative approach is to make crosscountry comparisons using macroeconomic data. A number of such studies are discussed. In assessing whether education has any external effect on economic growth, assumptions must be made about education's direct effect on earning power. Based on a conservative figure of a **_5_** to 8 percent increase in eamings for every year of education, there is some evidence to support the presence of a small externality, but the evidence cannot be said to be overwhelming.

There is, however, much clearer evidence of a link between education and fertility rates. The effect is observed in both macroeconomic data and household studies, but is stronger in macroeconomic data for reasons that are not clear. This effect constitutes an extemality that - at a time of widespread (but not universal) concem about - population growth is of great importance.

Weale develops a simulation model from work by Barro and Becker. The model links fertility decisions with consumption/saving decisions. In this model, parents derive utility from their children's welfare; as a consequence, children are a form of saving. The model is extended to reflect education as an endogenous decision and then further to look at the effects of an external effect of education on economic growth. Simulations demonstrate that the rate of return on education relative to that on physical capital is a major influence on fertility, suggesting that the model sheds some light on education's extemal effect on fertility.

ThePolicy ResearchWorking PaperSeriesdisseminates thefidingsof workunder wayin theBank. Anobjectiveof theseries is to get these findings out quickly, even if presentations are less than fully polished. The fndings, interpretations, and conclusions in these papers do not necessarily represent official Bank policy.

Produced by the Policy Research Disseniination Center