Unlocking Growth: How Education and Innovation Policies Can Supercharge the Economy
What drives long-term economic growth? For decades, the most common answer has been innovation: new ideas, new technologies, and new ways of doing things that push the productivity frontier forward. But this answer misses a crucial point. Behind every breakthrough there is a person—someone with talent, opportunity, and the training to turn raw potential into real impact.
A new paper published in The Review of Economic Studies, “Tapping into Talent: Coupling Education and Innovation Policies for Economic Growth”, by Ufuk Akcigit (University of Chicago), Jeremy Pearce (Federal Reserve Bank of New York) and Marta Prato (Department of Economics, Bocconi University), argues that education and innovation policies must be seen not as separate tools, but as two sides of the same coin.
Denmark as a policy laboratory
To test their theory, the researchers turned to Denmark—a country that, starting in 2002, launched a sweeping set of reforms aimed at boosting both innovation and higher education. The government introduced generous R&D subsidies, increased university funding, and doubled the number of PhD training slots.
This makes Denmark an ideal “natural experiment”. Using detailed administrative data covering the years from 2001 to 2013, the researchers tracked individuals across their education and career trajectories, combining IQ scores (from military service tests), parental income, education attainment, and patent filings.
What they found is both intuitive and alarming. PhD graduates are about ten times more likely to file a patent than college graduates, and thirty times more likely than those without a college degree. But getting to that level depends not only on talent—measured by IQ—but also on family income. Even in a high-income, high-welfare country like Denmark, talented students from poorer backgrounds are far less likely to pursue a PhD.
The model: talent, education, and growth
Building on this evidence, the authors developed a new economic model that puts individuals—as opposed to firms—at the center of the innovation process. It shows how talent, preferences, and financial constraints interact to determine who becomes a researcher and who does not.
In this model, even the most talented individuals might never pursue higher education if they lack the means to afford it. And even when slots at universities are expanded, there’s a risk: average talent may decline if the expansion is not matched by targeted support to help the most capable students overcome financial barriers.
As Professor Prato explains, “Education policy is an integral component of a policymaker’s toolkit for overall innovation. It cannot be thought of separately from its impact on the allocation of talent into research.”
What works—and when
The paper’s policy simulations show that, in the short term, R&D subsidies are the fastest way to increase innovation. They help current researchers invest in equipment and accelerate discovery. But in the long run, education subsidies are even more effective—especially in more unequal societies.
The most effective strategy depends on a country’s budget. With limited resources, governments should prioritize education subsidies that help talented but underprivileged students access higher education. With more generous funding, a mix of R&D support and education grants works best. Only at higher investment levels does it make sense to expand PhD slots—provided quality doesn’t suffer.
However, the key takeaway is timing. While R&D policies yield quicker wins, education policies take about nine years to show their full impact. Patience, in this case, truly is a virtue.
