The returns to investment in education: Some theoretical and empirical insights

Abstract

The aim of this study is to examine the importance of investment in human capital, methods for empirical assessment, challenges during the estimation as well as the main findings of the studies having dealt with this issue on the global scale. This study shows that empirical assessment of investment in human capital is mainly done by calculating the rate of return to schooling, which in most cases is realized through two methods: full discounting method and the Mincer`s earnings equation. For some reasons, researchers have preferred to use more the second method, even though it has been criticized in several cases due to some assumptions made, especially for the fact that it considers schooling as exogenous, omitting the role of innate abilities. Many researchers have used different strategies to handle the issue of innate ability, however, there are still doubts whether these strategies improve the situation in assessing the rate of return to education. However, regardless of the methodology used, the study shows that investment in human capital plays an important role in increasing workers productivity, reducing poverty, reducing gender differentials and bringing a range of other personal and social benefits.