What's the Return on Education?

December 11, 2005
Economic View
What's the Return on Education?

By ANNA BERNASEK
SOCRATES once said that the more he learned, the more he became convinced of his own ignorance. It's a familiar feeling for anyone who tries to make sense of the American education system.

This academic year, the better part of $1 trillion will be spent on education in the United States. That's an awful lot of spending, approaching 10 percent of the overall economy. But what exactly is the return on all of that money?

While the costs are fairly simple to calculate, the benefits of education are harder to sum up.

Much of what a nation wants from its schools has nothing to do with money. Consider the social and cultural benefits, for instance: making friends, learning social rules and norms and understanding civic roles.

But some of the most sought-after benefits from education are economic. Specialized knowledge and technical skills, for example, lead to higher incomes, greater productivity and generation of valuable ideas.

Those benefits are vital to a nation's growth. In recent years, Americans have become keenly aware of the impact of education as freshly educated workers from China and India compete for good jobs once held in the United States.

Today, many parents have a gut feeling that education is the way to ensure prosperity for their children, yet there is surprisingly little certainty about how much education contributes to the nation's overall wealth.

It is largely a problem of measurement. Economists have tried for decades to quantify the impact of education. They still don't have all the answers, but their work can shed some light on what Americans are getting for their investment. That information could serve as a backdrop for debates on how much government should spend on education and what should be left to individuals.

Start with what economists are confident about: the payoff to individuals. By measuring the relationship between the number of years of schooling and income earned in the job market, economists think that they have a good idea of what it's worth.

Alan B. Krueger, an economics professor at Princeton, says the evidence suggests that, up to a point, an additional year of schooling is likely to raise an individual's earnings about 10 percent.

For someone earning the national median household income of $42,000, an extra year of training could provide an additional $4,200 a year. Over the span of a career, that could easily add up to $30,000 or $40,000 of present value. If the year's education costs less than that, there is a net gain.

The payoff, of course, varies by individual. Another year of education will not have the same benefit for everyone. And school resources matter as well. According to studies by Professor Krueger and others, class size, teacher quality and school size can make a difference in the outcome. They have found that the effect of better schools is most pronounced for disadvantaged students.

There is less certainty about the big picture. That is partly because educational benefits accrue to the economy gradually, often showing up years after schooling is complete. Another problem is the difficulty of quantifying indirect benefits. One unknown, for example, is the degree to which formal education fosters new commercial ideas and technological breakthroughs.

While there is little doubt that there are benefits, those measurement challenges have led to big shifts in the conclusions of economic studies over time. In the early 1990's, economists calculated big economic rewards from additional investment in education. A decade later, the conclusions were different: studies suggested that while one individual might gain advantage over another through greater education, there might be no overall economic benefit.

Today, economists suspect that the truth is somewhere in the middle. Jonathan Temple, an economist at the University of Bristol in England, says the research trend is moving back toward the earlier findings. The latest attempts to quantify the impact of education on total economic growth have tended to conclude that it is at least as significant as that measured for individuals.

Because indirect benefits can't be counted accurately, Professor Temple suspects an even bigger impact. Insofar as education enhances worker productivity, there is a clear benefit to the economy.

Two Harvard economists, Lawrence F. Katz and Claudia Goldin, studied the effect of increases in educational attainment in the United States labor force from 1915 to 1999. They estimated that those gains directly resulted in at least 23 percent of the overall growth in productivity, or around 10 percent of growth in gross domestic product.

The most important factor was the move to universal high school education from 1910 to 1940. It expanded the education of the work force far more rapidly than at any other time in the nation's history, creating economic benefits that extended well into the remainder of the century, according to Professors Katz and Goldin. That moved the United States ahead of other countries in education and laid the foundation for the expansion of higher education.

Today, more Americans attend college than ever before, but the rest of the world is catching up. The once-large educational gap between the United States and other countries is closing - making it increasingly important to understand what education is really worth to a nation.

If economists are right, it is not just part of the cost of maintaining a functioning democracy, but a source of wealth creation for all. That means that investing in the education of every American is in everyone's self-interest.

Still, we're a long way from being able to judge the right level of spending on education - and how to achieve it. With a college degree more important than ever, the cost of higher education is rising steeply, creating growing stress for many American families. With more study, researchers may be able to identify ways of reducing costs while increasing the payoff from education.

Taking our cue from Socrates, the first step may be to recognize what we don't know.


Copyright 2005The New York Times Company