Is education really important to success?


Ludger Woessmann

Ludger Wößmann is Professor of Economics of Education at the Ludwig Maximilians University in Munich and head of the Ifo Center for Economics of Education. Above all, he researches the importance of education for economic prosperity and the importance of the institutional framework of the school system for its efficiency and equal opportunities. His latest book "The Knowledge Capital of Nations" (together with Eric A. Hanushek, Stanford University) has just been published by MIT Press.

John F. Kennedy said: "There is only one thing that is more expensive in the long run than education: no education." Current research in educational economics shows how right he was. Nothing is more important for the long-term prosperity of individuals and entire societies than good education, both for the broader population and for the most capable. What are the consequences for educational policy?

Learning as an investment? "The consequential costs of inadequate education due to lost economic growth are enormous." (& copy picture alliance / zb)

From an economic point of view, education can be seen as an investment in the knowledge and skills of the population. Education equips people with the skills that will make them more productive in doing their job. In addition, it imparts the knowledge and skills that enable people to develop and apply new ideas, which in turn generate innovation and technological progress. To the extent that skills, knowledge and competencies increase individual productivity, better educated people will have higher incomes and will be less at risk of unemployment. At the level of the economy as a whole, education can fuel long-term economic growth by increasing macroeconomic productivity and by helping to create and disseminate innovations that bring about technological advances.

What is the economics of education?

The economics of education examines education from an economic point of view. On the one hand, it is about how education affects the economic prosperity of both individuals and society as a whole.

On the other hand, the economics of education also examines the causes of successful education, for example in the area of ​​family background, the financing and resources of the educational institutions and the institutional framework conditions of the educational system.



Education and macroeconomic prosperity

Recent scientific studies show that the educational performance of the population, as measured for example as competencies in international student tests, is indeed the most important determinant of long-term economic growth (Hanushek and Wößmann 2008, 2015). To investigate this, we have summarized the results of the international school achievement studies in mathematics and natural sciences that have been carried out in many countries around the world since the mid-1960s - the PISA predecessor studies, so to speak - to a measure that is intended to reflect the average school achievement of the population of these countries . We then calculated what impact these average student performance had on economic growth in these countries.

For the 50 countries for which internationally comparable economic data are available in addition to student performance data, the picture shown in the figure emerges: The better the performance in the PISA predecessor tests, the higher the growth in gross domestic product per capita since 1960. The clear correlation is astonishing: In countries with high skills, the economy has grown rapidly, countries with low skills have barely left the job. While Singapore (SGP), one of the countries with the best educational achievements, grew by an average of more than 6 percent annually, the growth rate of Peru (PER), one of the countries with the worst educational achievements, was below 1 percent. In other words: The inhabitants of Peru are on average around half richer in 2000 than they were in 1960; Singapore's residents, on the other hand, are over thirteen times as rich as they were in 1960!

Educational performance and long-term economic growth (More on this ...) (bpb) License: cc by-nc-nd / 3.0 / de /
Such a simple model, which, in addition to educational performance, only includes the starting level of gross domestic product per capita, can explain most of the international differences in long-term economic growth. The influence of educational services on economic growth is extremely robust; it persists even if other factors that are important for economic growth are added, such as openness to international trade, security of property, the location in the tropics, fertility or capital.

Furthermore, once educational performance is taken into account in the growth model, the sheer number of years of education turns out to be meaningless. In other words: education only has an economic impact to the extent that it actually imparts higher skills. It is not enough just to hit the school or university bench; it depends on what you have learned.

In principle, the relationship could also be the other way round: countries with strong economic growth can equip their schools better and therefore achieve higher educational achievements. Or third factors not considered, such as cultural differences or economic framework conditions, could be responsible for the connection by improving both economic growth and educational performance. However, current research impressively shows that the connection is a causal effect of higher educational performance (see Hanushek and Wößmann 2015 for details).

In addition, it can be seen that both a good educational base across the population and a sufficiently high performance peak have a major impact on economic growth. In this respect, one should never play off education among the general public and performance at the top against each other: Both are important. Good educational achievements - across the board as well as at the top - are the basis of long-term growth and thus the economic prosperity of a society.

Conversely, this means that inadequate educational achievements cost a society dearly. Calculations based on the relationship between educational performance and economic growth shown in the figure come to the result for Germany that in the long term (over the life span of a child born today) more than 13 trillion euros in additional gross domestic product could be achieved if the educational performance reached the level of leading European ones PISA countries like Finland would increase. The consequential costs of inadequate education due to lost economic growth are enormous.

This applies to developing countries as well as to developed economies. It shows, for example, that the extraordinarily poor economic development in Latin America over the past half century can, statistically, be largely attributed to the inadequate quality of its education systems. Many Latin American countries have a very respectable average
Qualification-specific unemployment rates 1975-2011 (More on this ...) (bpb) License: cc by-nc-nd / 3.0 / de /
Educational duration of their population. But in international comparative tests of the skills actually acquired, Latin American countries - as well as countries from sub-Saharan Africa - do very poorly. From a statistical point of view, this fully explains their overall low long-term growth rates since 1960.

Education and Individual Wealth

Better education pays off not only for society as a whole, but also for every individual. From an individual perspective, the higher the educational level, the lower the risk of unemployment and the higher the earned income. In Germany, unemployment among people with a university degree is around 2 percent, for people who have completed an apprenticeship 5 percent and for people without a vocational qualification around 20 percent. A good education is the best insurance against unemployment, which in Germany nowadays is mainly unemployment of the low-skilled.

Income after graduation (More ...) (bpb) License: cc by-nc-nd / 3.0 / de /
And also among those who have a job, the following applies: The average income of people with a university degree is around 70 percent higher than that of people who have completed an apprenticeship and around twice as high as that of people without a vocational qualification. In principle, the average income earned on the labor market increases with the educational qualification achieved. In general, empirical labor market research shows that later income increases by around 7 to 10 percent with each additional year of education, depending on the study. This positive relationship between education and success in the labor market is probably one of the most robust findings of empirical economic research (Card 1999; Heckman et al. 2006).

The few studies which, in addition to the years of education, can also link direct measures of competency with success in the labor market, also show that the competences actually acquired are of great importance. The PIAAC study, the so-called adult PISA, measures, for example, the everyday mathematical skills of adults in five skill levels. It has been shown that in this country each higher skill level accounts for an average additional income of almost a quarter - that is over 650 euros per month per level (Hanushek et al. 2015).

As the great macroeconomic growth effects of better education make clear, the better education of one does not come at the expense of the economic opportunities of the other. The idea that a good education is worthless if everyone had it are completely wrong. They are based on the misconception of an economic pie that is fixed in size and needs to be distributed. On the contrary, the growth effects show that the entire economy benefits from the better education of each individual. The facts show that the pie gets bigger when everyone reaches a higher skill level. This means that not only is there more for everyone who is better educated, but socially more is also available for the social security systems, for example through higher tax revenue and a reduced number of people in need. In short: because the modern economy is primarily based on the skills of the population, education is the key factor for the future development of our prosperity.

In addition to the importance for economic prosperity, numerous positive effects can also be demonstrated in other important dimensions: Good education enables people to act responsibly and to participate in social life. It can promote behavior that is regulated by civil society and civic awareness and contribute to a common canon of values ​​and social cohesion. In addition, numerous studies show that better education goes hand in hand with increased health awareness, fewer teenage pregnancies and falling crime rates (Lochner 2011).

Starting points for educational policy

Given that good education plays a key role in economic prosperity, the question arises of how politics can effectively increase the educational performance of the population. An initial research finding is sobering: an extensive literature almost uniformly comes to the result that mere reductions in class sizes and other additional expenses hardly improve student performance given the given institutional framework (Hanushek 2003; Hanushek and Wößmann 2011). In an international comparison, there is no connection between the level of expenditure and the measured student performance: the best countries no longer spend systematically. For example, Finland does not spend more per pupil than Spain or Italy, but does much better in the performance comparisons. There is no lack of money in the first place - above all, it has to be used effectively.

On the one hand, it is about the distribution of funds across the educational levels from early childhood education to adult education. The result is a stylized picture of a life cycle of education financing: the economic returns from investments in education, for example in the form of future earned income, tend to decrease with increasing age (Cunha et al. 2006). This is mainly because education is a dynamic process in which skills learned early facilitate later learning. The highest returns on public investments are in the area of ​​early childhood education for children from socially disadvantaged backgrounds, since it is precisely here that it cannot automatically be assumed that the children experience an educational environment at home (Heckman 2006, 2008).

In an international comparison, public investment in education per child in Germany is currently relatively low in early childhood and primary school, and relatively high in higher education. Shifting public spending from the late to the early phases of the educational life cycle could therefore make education financing both more efficient and fairer, as children from socially disadvantaged backgrounds in particular could benefit from the early investments. It should be borne in mind that parents in this country have to finance a large part of the education of the toddlers themselves through crèche and kindergarten fees, while the state finances free university studies, which particularly benefits children from better-off families.

On the other hand, a better use of funds depends on the institutional framework of the education system. These should create incentives for all involved so that their efforts to improve educational outcomes are worthwhile. Our analyzes of international student comparisons indicate that three institutional factors are particularly important: external reviews of the performance actually achieved by learners in educational institutions, more independence for schools and teachers ("school autonomy") and more competition between schools (Hanushek and Wößmann 2011). It is true that there is some disagreement in educational research as to whether or under what conditions educational performance can be sustainably improved through appropriate measures.

From an educational economics point of view, however, the positive effect of these factors can be justified: External performance tests make the results of the educational work visible; they provide information about the extent to which the expected learning outcomes (competencies) are actually achieved at a school and thus make local actors such as school administrators and teachers responsible for their actions. They also ensure that the results of the students' learning efforts are visible to others and can therefore pay off later. If the competencies to be achieved are set and checked externally in the form of educational standards, it can be left to the schools and teachers themselves to decide with which material and which teaching methods they achieve the educational standards. Because the schools usually know best what works and what doesn't on site. When parents finally have more choice between schools, they can choose what they consider to be the best alternative for their child, and poor schools lose their students. This creates a competition between schools for the best educational concepts from which the entire system can benefit.

All in all, a good education is the central factor for individual and social prosperity. Economic growth, employment, satisfactory income and the prevention of poverty - and thus the financial viability of the social security systems and the achievements of the social market economy - stand and fall with the knowledge and skills of the population. Ignoring the economic dimension of education would therefore endanger the prosperity of future generations. That is why an education policy that ensures that all people can achieve the best possible skills is the best social and economic policy.


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