Volume 5, Number 1 (Winter) 1970
Psacharopoulos, George. 1970. "Estimating Shadow Rates of Return to Investment in Education." Journal of Human Resources 5(1):34-50.
Internal rates of return to investment in education are estimated on the basis of the marginal social product of labor instead of the observed earnings. A comparison of the shadow to the actual rates of return to investment in labor skills suggested that privately advantageous decisions with respect to investment in human capital may be very inefficient when assessed in social terms. Discrete substitution possibilities between labor skills introduced in a fixed coefficients production function gave considerably more elastic marginal productivity curves for labor, as compared to the no-substitution version of the model. The proposed methodology is illustrated by an empirical application referring to Greece for the period 1954 to 1965, and the implications of the findings are analyzed in terms of educational planning.
The author is Senior Research Officer, Higher Education Research Unit, London School of Economics and Political Science, and Assistant Professor of Economics, University of Hawaii. The contents of this article are drawn mainly from George Psacharopoulos, "An Economic Analysis of Labor Skill Requirements in Greece, 1954-1965" (Ph.D. diss., University of Chicago, 1968). I am greatly indebted to Professor Theodore W. Schultz for suggesting the topic originally and for providing financial support through a Ford Foundation Fellowship. Special thanks are due to Professor Mary Jean Bowman for her continuous guidance and suggestions, and to Professors Henri Theil and Richard W. Parks for their criticisms that helped clear up many important issues. I am also indebted to Professor Samuel Bowles for a number of points. All shortcomings and errors are, of course, mine.
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