The Macroeconomic Returns to School Finance Reforms: Micro-Calibrated Predictions Meet Causal Evidence

A large literature posits a central role for human capital in determining macroeconomic output, while another documents substantial private returns to educational investment. However, whether private gains translate into aggregate gains remains uncertain, as signaling, displacement, or general-equilibrium adjustment may drive a wedge between private and aggregate returns. This paper bridges these literatures with causal evidence that state-level school finance reforms (SFRs) increase macroeconomic output. First, I combine design-based micro estimates of SFR effects on private earnings with a cohort replacement framework to simulate state-level earnings per worker. The simulation predicts little change for 10 to 15 years, then gradual gains as treated cohorts enter the labor force, reaching 7.8 percent after 60 years. Next, I test this prediction using the staggered implementation of SFRs across U.S. states. In an event-study framework, state-level earnings per worker track the predicted path, remaining flat through about 15 years before rising roughly 4.7 percent above counterfactual levels after 30 years — consistent with private earnings gains aggregating to the broader economy. Finally, I show that these effects extend to broader economic output, with GDP per capita declining modestly initially before rising to more than 5 percent above its counterfactual path after 30 years.