Private versus social returns to human capital: Education and economic growth in India

Author-Highlights•We study the relationship between education and growth, using data from India.•The effect of education growth on economic growth decreases with the size of the government sector.•The findings suggest that private and social returns to education differ significantly.

This paper investigates whether differences between private and social returns to education of government sector employees can contribute to an explanation of the “micro-macro paradox” in the literature on education and growth. We hypothesize that in India educated people find privately rewarding jobs in a sector in which social returns are low, namely the government sector. This could help explain high returns to education at the micro level and small or negative coefficients on education growth in growth regressions at the macro level. The empirical results, which are consistent with this hypothesis, are based on an analysis of state-level data from India spanning 40 years.