Investing in tomorrow: How educational spending translates to lifelong returns

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Teacher in front of children
Countries can help individuals and societies reap the benefits of education by ensuring that all children have access to a quality education from pre-school onwards. Copyright: Ed Wray/World Bank

What investment can you make that will almost guarantee that you will beat the stock market?

Each year of education for a person yields approximately a 10% rise in annual earnings, outpacing returns from the stock market.   This consistent 10% yearly increase persisted even amid the challenges posed by the COVID-19 pandemic. Moreover, beyond the individual graduate's earnings, society at large reaps the benefits of a more educated nation. Countries can do a lot to help, starting with ensuring that all children have access to a quality education from pre-school onwards.

Investment or expenditure?

Education, recognized as a fundamental human right according to various international declarations, serves as an essential human service. Across the globe, nations ensure a minimum standard of education, a tradition upheld for centuries. Individuals and families invest in education, as do employers and governments. In fact, most countries allocate 3-5% of their GDP and 10-20% of government expenditure to education, as indicated by Education Finance Watch 2023.

Beyond its inherent value, education also brings economic benefits. David Deming highlights the positive returns on investment in education, noting that one-third of the variation in income is due to education. He goes on to highlight the importance of investing in young children (as do many others including Heckman), but also for young adults.

The substantial economic return generated by education appears to be causal. Carolina Arteaga shows that human capital plays an important role in the determination of wages and rejects a pure signaling model. That is, it is the quality of education that determines wages, not the diploma without quality. She demonstrates this by citing a reform at a top university in Colombia that reduced the amount of coursework required to earn degrees, which led to a subsequent substantial decrease in wages. 

Social benefits

Education holds a significance beyond the financial returns it offers to students; it extends far beyond monetary gains. Education broadens the spectrum of choices available to individuals, acting as a conduit for the transmission of social values across generations. Moreover, it enhances both present and future consumption.

The transformative power of education is evident as it empowers young individuals to make informed and improved choices, fostering a sense of value for their own future and that of the global community.   In essence, education instills a future-oriented perspective in people.

Education fosters societal inclusion, with research indicating that investing in girls' education yields particularly significant returns. Malala, a prominent advocate for girls' education, aptly expressed the transformative potential by stating, “If one girl with an education can change the world, just imagine what 130 million can do.” Therefore, directing investments towards girls and women emerges as a wise strategy, contributing to greater inclusion and equity in society.

Trillions of dollars are allocated from public funds to institutions and individuals, operating on the assumption that a well-educated population significantly contributes to societal well-being. To assess the efficacy of this investment, it becomes crucial to evaluate the social returns of education, measuring its impact on the overall economy. Despite the longstanding economic concept of human capital spillovers, quantifying these social returns remains a complex undertaking, raising questions about whether the societal benefits of education might surpass private gains, as speculated for over a century.

The collective benefit of education expands with an increasing number of educated individuals. When residents in a community or metropolitan area derive advantages from having educated peers, they essentially harvest social returns from the education of others.

Moreover, education plays a pivotal role in enhancing productivity. Improving access to schooling and elevating the quality of education becomes imperative as countries grapple with productivity slowdowns in the region.

The broader or social benefits of education encompass both monetary and non-monetary returns. These include reductions in crime rates, controlled population growth, decreased poverty, economic growth in regions, augmented tax revenues, a cleaner environment, enhanced health for individuals and their families, slower disease spread, stability in two-parent homes, education for children, lower mortality rates, diminished prejudice and intolerance, increased support for civil liberties, active participation in civil society and politics, and advocacy for climate action, among others.

Going forward

Looking ahead, it is imperative to delve deeper into understanding the returns to education and unravel the reasons behind certain groups not reaping its benefits. Given the substantial social returns associated with education, the evident under-investment in schooling raises concerns. Identifying groups that are inadequately investing or not working after graduation, and devising effective interventions, becomes a crucial focus for both research and policy initiatives. Prioritizing approaches aimed at enhancing schooling, elevating its quality, and maximizing social benefits emerges as another key area of focus.

 

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