University of Michigan
Center for Global Development
The economic consequences of large-scale government investments in education depend on the general equilibrium (GE) effects in both the labor market and the education sector. I develop a novel general equilibrium model and derive sufficient statistics that capture the economic consequences of a massive countrywide schooling initiative implemented by the Indian government. I provide unbiased estimates of the sufficient statistics using a Regression Discontinuity design. The earnings returns to a year of education are 13.4%. The general equilibrium labor market effects are substantial: they depress the returns to skill and dampen the increase in economic benefits. These GE effects have distributional consequences across cohorts and skill groups, where as a result of the policy unskilled workers are better off and skilled workers are worse off. In the education sector, more private schools enter these markets negating concerns of crowd-out. These results indicate that researchers and policymakers need to consider the GE effects when scaling up micro-interventions.