Economic returns to education

  • The role of cognitive and socio-emotional skills in labor markets

    Cognitive skills are more relevant in explaining earnings, socio-emotional skills in determining labor supply and schooling

    Pablo AcostaNoël Muller, October 2018
    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.
  • Do skills matter for wage inequality?

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

    Stijn Broecke, February 2016
    Policymakers in many OECD countries are increasingly concerned about high and rising inequality. Much of the evidence (as far back as Adam Smith’s ) 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.
  • Intergenerational return to human capital

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

    Paul J. Devereux, May 2014
    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.
  • 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

    Elizabeth Dhuey, March 2016
    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.
  • The value of language skills

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

    Gilles Grenier, November 2015
    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.
  • Improvement in European labor force participation

    Do structural reforms or educational expansion drive higher employment and participation rates?

    Daniel Gros, February 2019
    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.
  • For long-term economic development, only skills matter

    Economic growth determines a nation’s long-term economic well-being and crucially depends on skills

    Eric A. Hanushek, March 2017
    Politicians typically focus on short-term economic issues; but, a nation’s long-term economic well-being is directly linked to its rate of economic growth. In turn, its growth rate is directly linked to the economically relevant skills of its population. Until recently, however, economists have found it hard to confirm this through empirical analysis because of difficulties in measuring the skills of different societies. International tests of mathematics and science achievement now offer reliable measures of a population’s relevant cognitive skills.
  • How effective is compulsory schooling as a policy instrument?

    Changes in compulsory schooling laws have significant effects on certain population groups, but are costly to implement

    Colm P. Harmon, March 2017
    Compulsory schooling laws are a common policy tool to achieve greater participation in education, particularly from marginalized groups. Raising the compulsory schooling requirement forces students to remain in school which, on balance, is good for them in terms of labor market outcomes such as earnings. But the usefulness of this approach rests with how the laws affect the distribution of years of schooling, and the wider benefits of the increase in schooling. There is also evidence that such a policy has an intergenerational impact, which can help address persistence in poverty across generations.
  • Why do STEM immigrants do better in one country than another?

    Where STEM immigrants were educated strongly influences their economic success and possibly their impact on innovation

    Garnett PicotFeng Hou, April 2019
    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.
  • Skill mismatch and overeducation in transition economies

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

    Olga Kupets, December 2015
    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.
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