Economic returns to education

A growing body of research has begun to examine the match between student ability and university quality. Initial research focused on overmatch—where students are lower attaining than their college peers. However, more recently, attention has turned to undermatch, where students attend institutions with lower attaining peers. Both have been shown to matter for student outcomes; while in theory overmatch could be desirable, there is evidence that overmatched students are less likely to graduate college. Undermatched students, meanwhile, have been shown to experience lower graduate earnings.

Evidence shows that many college graduates are employed in jobs for which a degree is not required (overeducation), and in which the skills they learned in college are not being fully utilized (overskilling). Policymakers should be particularly concerned about widespread overskilling, which is likely to be harmful to both the welfare of employees and the interests of employers as both overeducation and overskilling can lead to frustration, lower wages, and higher quitting rates while also being a waste of government money spent on education.

Over recent decades, Western countries have admitted many immigrants from non-traditional regions (e.g. Philippines, India, China), which has coincided with poor economic integration. Language proficiency is an important determinant of economic integration; in addition to being a component of human capital, it plays a key role in facilitating the transmission of other components of human capital. Examining the strengths and weaknesses of objective and subjective measures of language proficiency is crucial for good integration policy, as is understanding the relationship between these measures and earnings, a key indicator of economic integration.

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.

Canada, the US, and most Western countries are looking to STEM (science, technology, engineering, and mathematics) immigrants to boost innovation and economic growth. Canada in particular has welcomed many STEM immigrants over the past quarter of a century. In the US, there is an ongoing debate about whether the H–1B visa program is being used effectively to attract more STEM immigrants. Interestingly, significant differences exist between the two countries in earnings and likely the innovation activity of highly educated immigrants, which highlights the likely role of immigration policy in determining such outcomes.

Employment and labor force participation (LFP) rates have increased throughout Europe since the 1990s, with little interruption from the Great Recession. While many credit labor market reforms for this progress, ongoing educational expansion might actually be more important. This implies that the overall employment rate of an economy can change if the share of the population with tertiary education increases, even in the absence of any labor market reforms or effects of the business cycle. Taking this compositional effect into account makes it possible to disentangle the impact of reforms.

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.

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.

Formal schooling increases earnings and provides other individual benefits. However, societal benefits of education may exceed individual benefits. Research finds that higher average education levels in an area are correlated with higher earnings, even for local residents with minimal education. Science, technology, engineering, and mathematics (STEM) graduates appear to generate 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.

Common proxies, such as years of education, have been shown to be ineffective at capturing cross-country differences in skills acquisition, as well as the role they play in the labor market. A large body of research shows that direct measures of skills, in particular cognitive and socio-emotional ones, provide more adequate estimations of individuals’ differences in potential productive capacity than the quantity of education they receive. Evidence shows that cognitive skills in particular are quite relevant to explain wages, while socio-emotional skills are more associated with labor force and education participation decisions.