The role of improved schooling, a central part of mo st development strategies, has become controversial because expansion of school attainment has not guaranteed improved economic conditions. This paper reviews the role of education in promoting economic well-being, with a particular focus on the role of educational quality. It concludes that there is strong evidence that the cognitive skills of the population rather than mere school attainment are powerfully related to individual earnings, to the distribution of income, and to economic growth. New empirical results show the importance of both minimal and high level skills, the complementarity of skills and the quality of economic institutions, and the robustness of the relationship between skills and growth. International comparisons incorporating expanded data on cognitive skills reveal much larger skill deficits in developing countries than generally derived from just school enrollment and attainment. The magnitude of change needed makes clear that closing the economic gap with developed countries will require major structural changes in schooling institutions.
Impacts of School Attainment on Individual Incomes
Most attention to the value of schooling focuses on the economic returns to differing levels of school attainment for individuals . This work, following the innovative analyses of human capital by Jacob Mincer (1970, 1974), considers how investing in differing amounts of schooling affects individual earnings. Over the past thirty years, literally hundreds of such studies have been conducted around the world. 1 These studies have uniformly shown that more schooling is associated with higher individual earnings. The rate of return to schooling across countries is centered at about 10 percent with variations in expected ways based largely on scarcity: returns appear higher for low income countries, for lower levels of schooling, and, frequently, for women (Psacharopoulos and Patrinos (2004)). Much of the academic debate has focused on whet her these simple estimates provide credible measures of the causal effect of schooling. In particular, if more able people tend also to obtain additional schooling, the estimated schooling effect could include both the impacts of schooling and the fact that those continuing in school could earn more in the absence of schooling. 2 For the most part, employing alternative estimation approaches dealing with the problems of endogeneity(In a statistical model, a parameter or variable is said
to be endogenous when there is a correlation between the parameter or
variable and the error term) of schooling do not lead to large changes in the estimates, and many times they suggest that the returns are actually larger with the alternative estimation schemes than with the simpler modeling strategies.If on the other hand schooling was more of a selection device than of a means of boosting knowledge and skills of individuals, the social return could be below the private return.Although there are many uncertainties about precisely how social returns might differ from private returns, there is overall little reason to believe that the social returns are less than the private returns, and there are a variety of reasons to believe that they could be noticeably higher.
Impacts of Educational Quality on Individual Incomes Developed Countries
The concentration on school attainment in the academic literature, however, contrasts with much of the policy discussion that, even in the poorest areas, involves elements of “quality” of schooling. Most countries are involved in policy debates about the improvement of their schools. These debates, often phrased in terms of such things as teacher salaries or class sizes, rest on a presumption that there is a high rate of return to schools in general and to quality in particular. But it is not appropriate simply to presume that any spending on schools is a productive investment that will see the returns estimated for attainment. It is instead necessary to ascertain two things: how various investments translate into quality and how that quality relates to economic returns. This section provides a summary of what is known about the individual returns to educational quality in both developed and developing countries.
One of the challenges to understanding the impact of quality differences in human capital has been simply knowing how to measure quality.Much of th e discussion of quality in part related to new efforts to provide better accountability has identified cognitive skills as the important dimension. And, while there is ongoing debate about the testing and measurement of these skills, most parents and policy makers alike accept the notion that cognitive skills are a key dimension of schooling outcomes.The question is whether this proxy for school quality students’ performance on standardized tests is correlated with individuals’ performance in the labor market and the economy’s ability to grow.
Until fairly recently, little comprehensive data have been available to show any relationship between differences in cognitive skills and any related economic outcomes. The many analyses of school attainment and Mincer earnings functions rely upon readily available data from censuses and other surveys, which find it easy to collect information on earnings, school attainment, age, and other demographic information. On the other hand, it is difficult to obtain data on cognitive skills along with earnings and the other determinants of wages. Although cognitive test and school resource data are increasingly available at the time of schooling, these are seldom linked to subsequent labor market information. Such analyses generally require tracking individuals over time, a much more difficult data collection scheme. Such data are, however, now becoming available
Three U.S. studies provide direct and quite consistent estimates of the impact of test performance on earnings (Mulligan (1999); Murnane, Willett, Duhaldeborde, and Tyler (2000); Lazear (2003)). These studies employ different nationally representative data sets that follow students after they leave school and enter the labor force.Murnane, Willett, Duhaldeborde, and Tyler (2000) provide evidence from the High School and Beyond and the National Longitudinal Survey of the High School Class of 1972. Their estimates suggest some variation with males obtaining a 15 percent increase and females a 10 percent increase per standard deviation of test performance. Lazear (2003), relying on a somewhat younger sample from NELS88, provides a single estimate of 12 percent. These estimates are also very close to those in Mulligan (1999), who finds 11 percent for the normalized AFQT score in the NLSY data. 8 Note that these returns can be thought of as how much earnings would increase with higher quality each and every year throughout the persons’ working career. Thus, the present value of the returns to higher quality is large.
There are other reasons to believe that these estimates provide a lower bound on the impact of higher achievement. First, the labor market experiences that are observed begin in the mid-1980s and extend into the mid-1990s, but other evidence suggest s that the value of skills and of schooling has grown throughout and past that period. Second, extrapolating from recent patterns, future general improvements in productivity are likely to lead to larger returns to skill.Finally, cognitive skills measured by test scores are prone to considerable measurement error. Even if the tests were measuring exactly the relevant skill concept, we know that there are substantial errors in each test.These errors will in general lead to downward biases in the estimated coefficients.
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