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The Rise in Returns to Education and the Decline in Household Savings

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Abstract
This paper explores the consequences of rising returns to human capital investment on the personal savings rate. Over the past two decades, the return to college education has increased relative to high school education leading economists to argue the presence of 'skill biased technological progress'. The literature explaining household savings has also burgeoned considerably, motivated by its declining rate in the US over the past couple of decades. Stylized facts suggest a negative relationship between returns to education and savings rates across most of the past century and also a negative relationship between education spending and savings rates across OECD countries. In this paper, we present a model where a declining savings rate emerges as an outcome of an exogenously driven increase in the return to education. The link between the two is attributed to optimizing behavior of altruistic households. The results of our model are robust to the inclusion of life cycle savings and unintentional bequests. Some of the interesting results of our model are (i) a rise in the return to education raises education spending ratio by less than what it reduces the aggregate savings rate (ii) for some parameter values it actually reduces both the education spending rate and the aggregate savings rate and finally, (iii) it also raises the return to capital due to physical capital-human capital complementarity.
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Suggested Citation

  • Areendam Chanda, 2005. "The Rise in Returns to Education and the Decline in Household Savings," Departmental Working Papers 2005-05, Department of Economics, Louisiana State University.
    • Handle: RePEc:lsu:lsuwpp:2005-05
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    File URL: https://www.lsu.edu/business/economics/files/workingpapers/pap05_05.pdf
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    References listed on IDEAS

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    2. Ziesemer, Thomas, 2007. "Estimations of US debt dynamics: Growth cum debt and the savings glut in Kouri’s model," MERIT Working Papers 2007-003, United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT).
    3. Marion Davin & Karine Gente & Carine Nourry, 2013. "Should a Country Invest more in Human or Physical Capital? A Two-Sector Endogenous Growth Approach," AMSE Working Papers 1330, Aix-Marseille School of Economics, France, revised May 2013.
    4. Xing Feng & Haiting Chen & Zhanhua Jia & Zhenxing Tian, 2023. "A Four-Dimensional Decomposition of Relative Poverty in China from the Perspective of Heterogeneity," Social Indicators Research: An International and Interdisciplinary Journal for Quality-of-Life Measurement, Springer, vol. 169(3), pages 795-816, October.
    5. Michael Walden, 2012. "Will Households Change Their Saving Behaviour After the “Great Recession”? The Role of Human Capital," Journal of Consumer Policy, Springer, vol. 35(2), pages 237-254, June.
    6. Ressler, Robert W., 2020. "What village? Opportunities and supports for parental involvement outside of the family context," Children and Youth Services Review, Elsevier, vol. 108(C).
    7. Wei-Bin Zhang, 2016. "Impact of Education Subsidies and Taxation on Wealth and Human Capital Accumulation," Eastern European Business and Economics Journal, Eastern European Business and Economics Studies Centre, vol. 2(3), pages 222-247.
    8. Salvador Contreras, 2013. "The Influence of Migration on Human Capital Development," International Economic Journal, Taylor & Francis Journals, vol. 27(3), pages 365-384, September.
    9. Wei-Bin Zhang, 2015. "National Education and Global Economic Growth: A Synthesis of the Uzawa–Lucas Two-Sector and the Oniki–Uzawa Trade Models," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 6(4), pages 905-928, December.
    10. Limor Hatsor, 2014. "Allocation of Resources in Educational Production: The Budget Puzzle," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 16(6), pages 854-883, December.
    11. Ziesemer, Thomas, 2005. "Growth with perfect capital movements in CES: US Debt Dynamics and model estimation," Research Memorandum 012, Maastricht University, Maastricht Economic Research Institute on Innovation and Technology (MERIT).

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    More about this item

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes

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