Estimating Shadow Rates of Return to Investment in Education

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.