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Education leads to Higher Earnings

Harry A. Patrinos's picture

At a time when students, parents and governments are looking more closely at the value of schooling, it is important to keep in mind that in addition to being a basic human service, education produces some strong economic benefits. One of the most commonly cited benefits are the earnings associated with schooling. These have been called the returns to investment in schooling.
 
While estimates of the economic rate of return to schooling have been provided by economists for more than 60 years, it is only recently that we have had such estimates for the vast majority of nations in the world. In a recent research, “Comparable Estimates of Returns to Schooling around the World,” we report the latest estimates of the private – what the individual student earns – returns to schooling using comparable data from 140 economies around the world and more than 800 household surveys.

In many emerging economies, education and labor market experience are the only human assets for a vast part of the labor force, especially the poor. Therefore, it is important for students, their families, providers and funders to know the economic benefits of investments in schooling.
 
The rate of return to schooling equates the value of life-time earnings of the individual to the net present value of costs of education. For an investment to be economically justified, the rate of return should be positive, and should be higher than the alternative rate of return.  For the individual, weighing costs and benefits means investing as long as the rate of return exceeds the private discount rate (the cost of borrowing and an allowance for risk).
 
Our results shows that there are significant returns to schooling. The stylized facts may be summarized as follows:
 
The rate of return to schooling overall is positive and significant. The global average private rate of return to schooling is 10 percent per year of schooling. Reviews of the literature also find that rate of return to another year of schooling is 10 percent. The returns to another year of schooling by region are highest in Sub-Saharan Africa (13 percent).  The five economies with the highest returns are all in Africa: Botswana, Ethiopia, South Africa, Tanzania and Rwanda. Returns are lowest in the Middle East and North Africa region (7 percent).
 
The returns to schooling are higher for women than for men.  The overall rate of return to another year of schooling for women is 12 percent and 10 percent for men.  At the primary school level the returns are about the same.  At the secondary and tertiary levels, the returns diverge, with higher returns for females at the secondary (9 versus 7 percent for men) and tertiary (17 versus 15) levels.
 
The private returns to schooling are highest at the tertiary level.  In a stunning reversal and what might be surprising to many is that the private returns to university education are now higher than the returns to primary schooling. The returns to primary schooling are above 10 percent, and they decline precipitously at the secondary level to just over 7 percent, before jumping to 15 percent at the tertiary level. Still, the returns are higher in Sub-Saharan Africa at all levels. There are variations by region: there are high returns to primary schooling in the Middle East and North Africa (especially for females), while the returns to tertiary are low.  Returns to primary schooling are surprisingly low in South Asia.
 
The returns to another year of schooling tend to decline as the level of schooling rises in an economy. That is, there is a decreasing pattern over time. This demonstrates that schooling increases respond to price signals. Therefore, as demand goes up and the supply follows, the price tends to fall.  But the returns to schooling have declined modestly over time despite rising average levels of schooling attainment, suggesting that the world demand for skills has been increasing as world skill supply has also increased.
 
In fact, there has been a tremendous increase in schooling attainment in recent decades.  In 2010, the world population aged 15 and above is estimated to have an average of 8 years of schooling, having increasing steadily from just over 5 years in 1980.  Average schooling has increased by 2 percent a year while the returns to schooling have declined by 0.1 percent a year. Therefore, another year of schooling leads to a reduction of the returns to schooling by one percentage point.
 
In my reviews of the literature with George Psacharopoulos (2004 and forthcoming), we compile the findings for 115 countries and end up with similar findings. Together, these studies account for 150 economies (76 percent of the 193 economies recognized by the United Nations), or 95 percent of the world’s population. Therefore, it is safe to say that education is a good investment globally, even considering only private monetary gain.
 
However, the results reported here are private returns. An economy should invest in human capital (as in any other capital) up to the point where the rate of return yielded by the last bit of investment is just equal to the rate of return yielded by the best alternative use of the resources. This means investing so long as the social return (which includes broader benefits to society, not of all costs) is greater than the social discount rate. Therefore, policy makers need to know the social returns to schooling.  We might not be able to obtain global estimates of the social benefits (externalities and non-market effects) of education, but we can estimate full social costs (what the government provides in terms of the supply of schooling). This is something our future research will address.
 
Follow Harry Patrinos on the Education for the Global Development Blog and twitter.
 

Comments

Submitted by Joe Collins on

Thanks for the article- a great overview of the literature. I would just say that it is worth putting in a caveat or footnote in the section "The returns to schooling are higher for women than for men." While the rates of return are consistently higher this can be misleading as in absolute terms women continue to earn less. The way the returns are calculated in the gender disaggregation is to for example, compare a woman with 12 years of education against a woman with none, and then the same for men. The data shows that the gap between these two groups is greater for women, but does not allow women to close the gap on men and certainly does not reverse it.

That is a very good point.  While the returns to women's schooling are higher than for men, women earn significantly less than men do in absolute terms.  We will make that point in the article before journal publication.  In addition, we will write a post on women's schooling challenges and the returns to schooling.  Thank you very much for pointing that out.

Harry

 

Submitted by Gustavo Arcia on

We need to figure out how to transfer the information about the returns to schooling to the public in developing countries in a way that makes sense to them. Anecdotal evidence shows that people in the lower two quintiles of the population are willing to pay a lot for english and computer classes because they see a clear link between these skills and work for good wages. Private providers use effective advertising to that effect. Can we find ways for public education to do the same for reading and numeracy, or for critical thinking and analytical skills? The data here shows that education pays. We need to get the word out.

Submitted by Harry Patrinos on

Gustavo, that is a good point. My sense is that people know that education is beneficial. The problem might be that they don't have the means or information about post-basic education. Information campaigns targeting those at risk of dropping out could be very beneficial. This works in the context of school choice in the USA and Netherlands, and it works in terms of reducing dropouts in Latin America. We would need to be creative about how to present the evidence on returns to schooling. Thanks, Harry

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