We know that the future earnings of individuals correspond to the investment in their education. Recent scientific studies confirm the existence of a positive relationship between education and individual earnings and point to how, on average, across a broad set of countries, one more year of education reflects in an increase in individual earnings of between 7.5% and 10% per year. Education is thus determinant in what economists refer to as human capital and driven by excellence in individual performance levels.
However, economic studies go far further in defending how the benefits of education to society, those deemed the social returns, actually outweigh the individual returns: education may accelerate economic growth. In fact, when comparing different rates of growth, the variations in levels of education stand out in keeping with their capacity to accompany the aforementioned differences. Some models that attempt to explain this interlink the average level of education with the productivity of each person in defending how the presence of more qualified employees brings about a boost to the productivity of other workers. In the terminology of economics, this effect is an externality as the decisions of one person about their education generate a direct impact on the others.
The externalities of education extend beyond the positive effects on the productivity outlined above. Education may also reduce the likelihood of engaging in activities that result in negative externalities. Indeed, and as Lance Lochner and Enrico Moretti detail, higher levels of education do interlink with lower levels of criminality. Better education also associates with more informed and active participation in civic life and, broadly speaking, leading to better decision-making.
The scope for education to make a social return greater than the individual level benefits holds major practical importance. In practice, this provides one key argument for the state financing education given this recognition of how education does not only reward the person but also fosters countless benefits shared by society. In recent years, a vast range of scientific articles seeking to evaluate the magnitude of these social returns have been published, especially with the objective of measuring the effectiveness of public investment in education. The conclusions of these studies do not always concur with the scale of these returns.
Education as a factor for convergence
In an analysis of these studies carried out in 2020, Ying Cui and Pedro S. Martins consider what determines these social returns from education, aggregating and summarising the results of a carefully selected sample of 31 scientific articles. These articles refer to a total of 15 countries (China, Denmark, Germany, Hungary, Indonesia, Italy, Kenya, the Netherlands, Portugal, Russia, South Africa, Switzerland, Tunisia, the United Kingdom and the United States) and cover around a third of the world’s population.
One of this study’s most interesting conclusions arises from how externalities from education are greater in lesser developed countries when compared with their counterpart developed peers. This confirms how education may constitute an important factor for convergence. Indeed, given the positive association between the level of education and the level of earnings, the countries with the lowest levels of earning also register the lowest levels of education. It is here, in the interactions between more and less well qualified workers, that there are major opportunities for the sharing of and competences that end up driving greater marginal social returns.
According to this argument, the dispersed distribution of education fosters still greater externalities. The authors then test this hypothesis through evaluating the impact of the average number of years of schooling and the proportion of students graduating from higher education with the scale of the externalities. The results demonstrate that while the average number of years of schooling reports a negative impact on externalities, the rise in the proportion of students completing university level education generates a positive effect, which represents an important source of externalities. The authors also evaluated the effects of the quality of education measured in conjunction with the results obtained in PISA – the Programme for International Students Assessment for the scale of the externalities but did not encounter any statistically significant effects.
The challenges of identifying externalities
The scientific articles serving as the basis for the Ying Cui and Pedro S. Martins study not only include different countries but also diverge in other aspects. Some articles measure the externalities in companies, others in regions, which leads these authors to conclude that the externalities are greater in companies due to their environments being more propitious to knowledge transfers. Furthermore, the externalities record lower levels when measured in terms of productivity than in salaries and wages even while, theoretically, the differences in productivity should be accompanied by differences in salaries. In fact, this expects that companies located in regions with higher levels of human capital and greater productivity face higher costs with the factors of production, especially the labour factor; should this not be the case, companies in cities with lower human capital levels should relocate to cities with greater human capital.
The articles incorporated into the Cui and Martins study also deploy different methods to make their respective estimates. Evaluating the externalities of education is difficult as human capital is not randomly distributed by geography: workers choose where to live based on factors such as wages and the cost of life. Ignoring this dimension may lead to overestimating these education based externalities. The calculations are also fewer in those articles with larger numbers of observations. Additionally, the articles with positive and statistically significant results may gain a greater likelihood of being accepted for publication, which would also reflect a certain bias.
There are thus many challenges to correctly identifying the social returns of education. Nevertheless, there is a strong correlation between the years of schooling and individual earnings, which represents, as seen above, one of the most robust results of these articles and it would thereby also seem unequivocally true that such externalities of education exist, stimulate economic growth and nurture convergence. They are heavyweight arguments for justifying investment in education.
Cui, Y., & Martins, P. S. (2021). What Drives Social Returns to Education? A Meta-Analysis. World Development, 148, 105651. https://doi.org/10.1016/j.worlddev.2021.105651
Hanushek, E., & Woessmann, L. (2020). The Economic Impacts of Learning Losses, Education Working Papers, n.º 225, OECD Publishing. https://doi.org/10.1787/21908d74-e
Lochner, L., & Moretti, E. (2004). The Effect of Education on Crime: Evidence from Prison Inmates, Arrests, and Self-Reports. American Economic Review, 94(1), 155-189.