Economic returns to education

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Intergenerational return to human capital

Better educated parents invest more time and money in their children, who are more successful in the labor market

10.15185/izawol.19 19 Devereux, P

by Paul J. Devereux

Governments invest a lot of money in education, so it is important to understand the benefits of this spending. One essential aspect is that education can potentially make people better parents and thus improve the educational and employment outcomes of their children. Interventions that encourage the educational attainment of children from poorer families will reduce inequality in current and future generations. In addition to purely formal education, much less expensive interventions to improve parenting skills, such as parental involvement programs in schools, may also improve child development.

School tracking and intergenerational social mobility

Postponing school tracking can increase social mobility without significant adverse effects on educational achievement

10.15185/izawol.56 56 Pekkarinen, T

by Tuomas Pekkarinen

The goal of school tracking (assigning students to different types of school by ability) is to increase educational efficiency by creating more homogeneous groups of students that are easier to teach. However, there are concerns that, if begun too early in the schooling process, tracking may improve educational attainment at the cost of reduced intergenerational social mobility. Recent empirical evidence finds no evidence of an efficiency–equality trade-off when tracking is postponed.

Is the return to education the same for everybody?

While a four-year college degree is financially beneficial for most people, it is not necessarily the best option for everyone

10.15185/izawol.92 92 Webber, D

by Douglas Webber

A postsecondary degree is often held up as the one sure path to financial success. But is that true regardless of institutional quality, discipline studied, or individual characteristics? Is a college degree always worth the cost? Students deciding whether to invest in college and what field to study may be making the most important financial decision of their lives. The return to education varies greatly by institutional quality, discipline, and individual characteristics. Estimating the returns for as many options as possible, and making that information as transparent as possible, are paramount in helping prospective students make the best decision.

Overeducation, skill mismatches, and labor market outcomes for college graduates

Overskilling or overskilling plus overeducation are more likely than overeducation alone to harm employee welfare

10.15185/izawol.88 88 Sloane, P

by Peter J. Sloane

There is evidence that many college graduates are employed in jobs for which a degree is not required, and in which the skills they learned in college are not being fully used. Most of the literature on educational or skill mismatch is based on cross-sectional data, providing information at just one point in time. Drawing meaningful conclusions about mismatch, its dynamics, and its relationship to wages, job satisfaction, and job mobility requires panel data, which can reach more nuanced conclusions by allowing for individual differences, e.g. choosing a job because it offers compensation.

Do higher levels of education and skills in an area benefit wider society?

Education benefits individuals, but the societal benefits are likely 
even greater

10.15185/izawol.130 130 Winters, J

by John V. Winters

Formal schooling increases earnings and provides other individual benefits. However, societal benefits of education may exceed individual benefits. Research finds that increased average education levels in an area are correlated with higher earnings, even for locals with relatively little education. Science, technology, engineering, and mathematics (STEM) graduates appear to have especially strong external effects, due to their role in stimulating innovation and economic growth. Several strategies to test for causality find human capital externalities do exist.

The boom in university graduates and the risk of underemployment

Better information on university quality may reduce underemployment and overeducation in developing countries

10.15185/izawol.165 165 Yamada, G

by Gustavo A. Yamada

As the number of secondary school graduates rises, many developing countries expand the supply of public and private universities or face pressure to do so. However, several factors point to the need for caution, including weak job markets, low-quality university programs, and job–education mismatches. More university graduates in this context could exacerbate unemployment, underemployment, and overeducation of professionals. Whether governments should regulate the quantity or quality of university programs, however, depends on the specific combination of factors in each country.

University dropouts and labor market success

Dropping out of university can be more advantageous than not having enrolled in university at all

10.15185/izawol.182 182 Schnepf, S

by Sylke V. Schnepf

With university education continuing to expand worldwide, university dropouts will make up a large group in future labor markets. Dropping out is routinely viewed as a negative indicator. However, data on university dropouts does not generally provide information on their labor market outcomes, so empirical evidence is sparse. The studies that have examined the issue show that dropping out can be more of an advantage than not having enrolled in university at all. Many dropouts are more likely than upper secondary school graduates with no university education to progress in their careers. And many graduate later in their life.

The value of language skills

A common language facilitates communication and economic efficiency, but linguistic diversity has economic and cultural value too

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by Gilles Grenier

In today’s globalized world, people are increasingly mobile and often need to communicate across different languages. Learning a new language is an investment in human capital. Migrants must learn the language of their destination country, but even non-migrants must often learn other languages if their work involves communicating with foreigners. Economic studies have shown that fluency in a dominant language is important to economic success and increases economic efficiency. However, maintaining linguistic diversity also has value since language is also an expression of people’s culture.

The role of preschool in reducing inequality

Preschool improves child outcomes, especially for disadvantaged children

10.15185/izawol.219 219 Waldfogel, J

by Jane Waldfogel

Children from disadvantaged families have lower levels of school readiness when they enter school than do children from more advantaged families. Many countries have tried to reduce this inequality through publicly provided preschool. Evidence on the potential of these programs to reduce inequality in child development is now quite strong. Long-term studies of large publicly funded programs in Europe and Latin America, and newer studies on state and local prekindergarten programs implemented more recently in the US, find that the programs do improve outcomes for young children, particularly for those from disadvantaged families.

Skill mismatch and overeducation in transition economies

Substantial skill shortages coexist with overeducation, affecting both young and old workers

10.15185/izawol.224 224 Kupets, O

by Olga Kupets

Large imbalances between the supply and demand for skills in transition economies are driven by rapid economic restructuring, misalignment of the education system with labor market needs, and underdeveloped adult education and training systems. The costs of mismatches can be large and long-lasting for workers, firms, and economies, with long periods of overeducation implying a loss of human capital for individuals and ineffective use of resources for the economy. To make informed decisions, policymakers need to understand how different types of workers and firms are affected by overeducation and skill shortages.

What is the economic value of literacy and numeracy?

Basic skills in literacy and numeracy are essential for success in the labor market

10.15185/izawol.229 229 Vignoles, A

by Anna Vignoles

Even in OECD countries, where an increasing proportion of the workforce has a university degree, the value of basic skills in literacy and numeracy remains high. Indeed, in some countries the return for such skills, in the form of higher wages, is sufficiently large to suggest that they are in high demand and that there is a relative scarcity. Policymakers need robust evidence in order to devise interventions that genuinely improve basic skills, not just of new school leavers entering the market, but also of the existing workforce. This would lead to significant improvements in the population that achieves a minimum level of literacy and numeracy.

Do skills matter for wage inequality?

Policies to tackle wage inequality should focus on skills alongside reform of labor market institutions

10.15185/izawol.232 232 Broecke, S

by Stijn Broecke

Policymakers in many OECD countries are increasingly concerned about high and rising inequality. Much of the evidence (as far back as Adam Smith’s The Wealth of Nations) points to the importance of skills in tackling wage inequality. Yet a recent strand of the research argues that (cognitive) skills explain little of the cross-country differences in wage inequality. Does this challenge the received wisdom on the relationship between skills and wage inequality? No, because this recent research fails to account for the fact that the price of skill (and thus wage inequality) is determined to a large extent by the match of skill supply and demand.

Age at school entry: How old is old enough?

A child’s age at school entry matters, and the implications of policy changes can have long-lasting effects

10.15185/izawol.247 247 Dhuey, E

by Elizabeth Dhuey

Laws on age at school entry affect student achievement and often change for a number of reasons. Older students are more mature and ready to learn. This can have positive impacts on academic, employment, and earnings outcomes. The costs of holding children back include another year of childcare expenses or income forgone by the caregiver parent. Entering the workforce one year later also has implications for lifetime earnings and remittances to governments. School-entry policies could be a useful tool in increasing student achievement, but the short- and long-term impacts need to be better understood.

Estimating the return to schooling using the Mincer equation

The Mincer equation gives comparable estimates of the average monetary returns of one additional year of education

10.15185/izawol.278 278 Patrinos, H

by Harry Anthony Patrinos

The Mincer equation—arguably the most widely used in empirical work—can be used to explain a host of economic, and even non-economic, phenomena. One such application involves explaining (and estimating) employment earnings as a function of schooling and labor market experience. The Mincer equation provides estimates of the average monetary returns of one additional year of education. This information is important for policymakers who must decide on education spending, prioritization of schooling levels, and education financing programs such as student loans.

How do adult returns to schooling affect children’s enrollment?

Raising future expected monetary gains to schooling and poor families’ current incomes promotes school enrollment in developing countries

10.15185/izawol.305 305 Swinnerton, K

by Kenneth A. Swinnerton

Universal completion of secondary education by 2030 is among the targets set by the United Nations’ Sustainable Development Goals. Higher expected adult wages traced to schooling may play a major role in reaching this target as they are predicted to induce increased school enrollment for children whose families wish to optimally invest in their children’s future. However, low incomes and the obligation to meet immediate needs may forestall such investment. Studies suggest that school enrollment in developing countries is positively correlated with higher expected future wages, but poor families continue to under-enroll their children.

How important is career information and advice?

Students’ decisions about their education can be, but are not always, improved by providing them with more information

10.15185/izawol.317 317 McNally, S

by Sandra McNally

The quantity and quality of educational investment matter for labor market outcomes such as earnings and employment. Yet, not everyone knows this, and navigating the education system can be extremely complex both for students and their parents. A growing economic literature has begun to test whether interventions designed to improve information about the costs and benefits of education and application processes have an effect on students’ behavior. So far, findings have been mixed, although the positive findings arising from some very carefully targeted interventions give cause for hope.