The use of formal education in Denmark 1980-1992

2. Theory of education and economic performance

Education effect the macro economy in three different ways (Hansen 1993) . First and
foremost education - as other human capital and as other capital investment - improve
productivity. Educated people work smarter, they specialize, work together, innovate and
therefore end up with higher production per employee: Education influences the way of
production. The importance of education, however, goes further than that. Through innovation
and specialization regions and countries produces the products in which they can exploit
comparative advantages in trade with other regions and countries: Education influences which
products are produced locally and exported and which are imported. Finally education to some
extend only work as a selection device and influences who is producing what.

All three sets of explanations can account for the stylised facts 1) and 2) in section 1 above
independently and of course combined.

If changes in the way of production is important the arguments goes like this: Contemporary
technological development (like computers) are biassed against low skill workers. The same
technology is available in all countries, and affects productivity economy-wide both in
agriculture, manufacturing, trade, transport, and service businesses in all advanced countries.
Low-skilled (low-educated) are therefore losing jobs economy-wide. They become more
abundant. If wages are set on free markets, they will eventually fall (USA and UK), and if
wages are inflexible unemployment will grow (Europe). No doubt, trade unions, collective
bargaining and the provision to extend the terms of union contracts to non-union workers play
in important role in explaining wage inequality (Blau & Kahn 1996).

The number of low skill jobs in advanced countries can also be falling because of increased
international competition due to trade liberalisation and improved means of transportation.
Low skilled (low educated) are losing because which products are produced locally are
affected by changes in the conditions for international trade. Changes in the international
division of labour for the advanced countries are biassed against low skilled. The results for
wages and unemployment are as above: falling real wages and/or increasing unemployment.
As Freeman (1995) puts it: “Are Your Wages Set in Beijing?”, as free trade means

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