Education and Economic Prosperity: The Devil’s in the Details

Great minds

Throughout history, pundits and leaders have alluded to a connection between education and economic prosperity. The theory seems plausible and most of us “know” intuitively that a better-educated society reaps greater economic benefits. But does the phenomena play out in the math? Can it be “proven” in a statistical sense? A recent report by the Milken Institute has set out to do just that. You can view the entire report here.

According the report:

Picture1

“Adding one extra year to the average years of school among the emplpoyed in a metro area is associated with an increase in real GDP per capita of 10.5% and an increase in real wages per worker of 8.4.”

To get to this return on investment, the authors plugged data into the equation below in order to see how inputs (labor and physical capital) translate to production output (measured as real GDP per capita).

Capture

Over 70% of the variation in real GDP across 261 metros from 1990 to 2012 was explained by the model. But, the devil is certainly in the details….

Yes, investing in education (in general) yields positive economic results but some educational investments will produce greater results than others. The report found that investing in education yeilds a greater economic result when policymakers concentrate on citizens with at least a high school diploma. Adding 1 additional year of school among citizens with at least a high school diploma yields a 17.4% increase in GDP per capita and a 17.8% increase in real wages per worker. On the other hand, adding 1 additional year of school among citizens without a high school diploma yields no significant effect upon GDP per capita or real wages. This finding is important for policymakers with limited resources and a need to deploy those resources in a strategic manner.

In addition, the report also found that industry mix matters. Given the same number of average years of schooling among the workforce, the returns to one more year of education are the greatest in metros with a large employment share of business and IT services industries. Both of these industries involve high-skilled jobs and entry-level employment in both industries requires post-secondary education. A high concentration of employment in high-skilled industries is certainly a tide that lifts all ships as employees in those industries buy houses and utilize services in a local economy.

So, given this information the authors wondered…what if the average years of schooling in all metro areas equaled 14.58- the average years of schooling in the best-educated metro in the country (the Washington-Arlington-Alexandria area)? What would be the effect on GDP per capita and real wages per capita in those economies?

Below are the results of this “what if” exercise for 7 of Louisiana’s largest metro areas:

what if

So how do we do it? How do policy makers in Alexandria, Baton Rouge, Houma, Lafayette, Monroe, New Orleans, and Sherveport move from where we are now to double digit GDP per capita growth? The authors of the study offer five policy recommendations:

policy recs

With decreased public investments in higher education occuring nationwide, I fear policy recommendation #1 may not be in the offing (at least in the short term). Recommendations #2 and #3, without increased financial aid, may work against one another. I do, however, have great hope for Recommendation #4; as state dollars dwindle institutions will have to become much more focused on what I call the “utility” of the degree and they will increasingly reach out to employers for feedback. As for #5, it looks like in the short term much R&D will likely be funded by private dollars, for better and for worse.

 

 

 

 

 

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