This year marks the 50th anniversary of the publication of Returns to education: An International Comparison by George Psacharopoulos. The book led to a revolution in analyses of the returns to education by showing that the average payoff to education is higher in less developed than in advanced countries. In comparing the social rate of return to human capital with that of investment in physical capital such as infrastructure, it was discovered that in less developed countries the rate of return to human capital is much higher. This suggests that less developed countries should attempt to stimulate economic growth by pumping more resources into human capital. Rate of return-based decision-making benefits low-income, rural and female students in particular.
Investment in education became a fashionable topic in the 1960s and researchers began to estimate its profitability. Policy makers use returns to education estimates to determine future education and labor policies. Before Returns to Education was published, many studies were conducted, but the empirical evidence on returns to education remained scattered. Psacharopoulos brought it together, and he used econometric analysis to investigate patterns and to study brain drain, the distribution of earnings, and the substitution of labor.
Investment or expenditure?
One way of looking at education is only as an expenditure. Students and their families spend on education. Employers spend on education. So do countries. For example, in the Europe and Central Asia region, about 12% of government spending is allocated to education.
But education is more than an expenditure line item: it is an investment – in teachers and students, but also in a country’s future work force.
Education brings a return of about 9-10%. This means that every year of learning generates about a 10% increase in earnings annually. But the value of education is much more than just the earnings it delivers. Education expands choices. It transfers social values between generations. It elevates consumption in the present – and in the future.
Through education, youth can make better choices – to value the future and the world. As shown in recent research, a higher level of education improves behaviors and policy choices in favor of pro-climate outcomes. One additional year of education increases pro-climate beliefs, behaviors, policy preferences, and green voting – with voting gains equivalent to a substantial 35% increase.
Education also helps countries as they transition to market economies. In ECA, this transition started 30 years ago, and we saw that the returns to education increased because of competitive market forces. Three decades later and the returns are even higher, especially for the countries that embraced reforms and those that eventually joined the European Union.
Education also contributes to greater productivity. Increasing access to schooling and improving the quality of education will help as countries in the region struggle with productivity slowdowns.
Research also shows that equitable access to quality education supports innovation. For instance, inventors are more likely to come from highly educated backgrounds and countries with higher quality schooling produce more innovators. Moreover, countries with good education systems that promote equity and quality are best prepared for the innovation challenge.
Reforms that improve quality and distribute opportunity fairly increase enrollment and help countries prepare for the future. Major reforms like those introduced in Finland in the 1970s and Poland in the early 2000s suggest that massive and persistent investment in education leads to significant increases in innovation, while making growth more inclusive.
Under assumptions first spelled out by Jacob Mincer, each additional year of schooling will lead to a percentage gain in earnings that is equal to the interest rate. Some basic facts about education and earnings:
- Average returns are 9%
- High for primary historically; higher now for tertiary
- Better returns than stock market
- Returns to schooling higher for women
- Returns highest in lower income countries
The rapid expansion in schooling has not dented the returns much over time. Even as more people are investing in education the returns are not decreasing much. While it makes sense to see higher returns in countries with less schooling, we are also seeing healthy returns in countries with high levels of schooling. In fact, the returns are highest at tertiary level even in low-income countries. This has been characterized as a race between education and technology. In other words, the supply of schooling is not keeping up with the demand for skills. The demand for skills is increasing due to technological change that puts a premium on higher order competencies. School systems are struggling to keep up in terms of numbers and quality.
Enrollment and rate of return to higher education
Going forward, governments need to consider the (private and social) rates of return to schooling before deciding where and how to invest.