Utah working families face economic hardships
Here's a quote:
(W)ithout investment in the state's poor working families,... they will not be an integral component of Utah's future economic growth and prosperity. (The report's author) called on legislators to ensure that educational and training programs are affordable, accessible and tailored to the demands of a knowledge-based economy.
But will that really work? Will additional investments in education help the working poor?
Data say... yes.
Here's why:
Let's think about the factors that increase peoples' wages. One factor is experience. As people get more experience in the workforce, they acquire more skills and become more productive. Supply and demand bids up wages for more productive workers, so more experience means higher wages. On average, it turns out that an additional year of labor market experience boosts wages by 1.5% (depending a bit on how and when you measure it). This is one reason that the poor tend to be young; they haven't had time to acquire enough skills to earn their way out of poverty.
Another factor that increases wages is education. As people get more education, they become more productive. Again, supply and demand bids up wages, so more education means higher wages too. On average, it turns out that an additional year of education boosts wages by an astonishing 8%. Yeah, that's right --- "real world" experience is valuable... but a year of education is more than five times as valuable. Five times! (And of course the exact figure depends on how you measure, but I think the consensus of labor economists is that my numbers are about right.)
These aren't made up numbers. They come from studying the relation between real wages and real experience and real education (using linear regression models and some tricks to help figure out causal linkages) in huge data sets collected by the US Census.
So, if a local high school grad has to skip two years at SLCC and instead go into the workforce... that's a net difference in yearly wages of around 13%. Think of how much of a difference a 13% raise would make for a working family. That's a lot of money, when you add it up over forty years in the workforce.
We always hear that education is a great investment. And labor economists' numbers bear that message out.
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9 comments:
The article seems to ignore some pretty important data that would help us understand if this really is worth the investment--the cost of the program.
While there is little doubt that experience and education can make a huge difference in an individual's income, don't we have to consider the cost? If the cost of the education is 3% of future earnings and the payback is 15%, then it is worth it (at least to the student). But what if the costs are higher than the net payback? This isn't very clear--and a better reporter would ask the question.
Also, who pays for the initial investment and how do we measure the net benefit to them (the payee)? If the government pays to educate the individual, the individual will certainly benefit with higher earnings, but will the government recoup its investment with higher future taxes paid, lower crime, lower social costs, etc.? How does an economist measure that?
I assume the payback is positive and would generally agree these kinds of programs are worth pursuing (in the absence of other programs with a better payback), but without the data, who knows?
-rm
emba '09
Good points, rm.
This data is available, and it's not too hard to incorporate the costs in a big analysis of the net social returns to investments in education. With these big census datasets, it's actually not that hard to estimate the effect of education on things like incarceration rates and social programs.
Here's a link to a study from a few years back:
http://www.policyarchive.org/handle/10207/7016
This one asks in particular how much we'd have to spend in order to reduce the educational attainment gap between whites on the one hand and Hispanics and blacks on the other hand, and whether it'd be worth it.
This analysis suggests that each dollar spent on education returns an additional 2 to 3 back to the gvt. Not too different from the figures that SLCC publishes itself.
http://www.slcc.edu/ir/docs/ccbenmainreport.pdf
I should also point out that one of the hard issues with studies like this is assessing causality. That is, does education cause people to be less likely to subsequently commit crimes, or is it instead that people who know they don't want to be criminals choose to get education?
Unraveling causality is is important for the following reason: These studies typically assume that education causes a reduction in crime. But if instead the reason that education is associated with less crime is that criminal types don't like school, then sending criminal types to school (which is what additional investment in schools would do) will have a smaller-than-expected effect on the crime rate.
Causality-related puzzles take up a lot of energy for empirical economists. They're hard problems.
And it's a good segue, since causality issues are central to assessing the immigration/unemployment link, which I'll write about next week.
I seem to recall that there's a signaling theory of education that undermines this argument. Something to the effect of people need to signal how smart, teachable, and social they are because those are underlying endowments that lead to job success. They obtain degrees to do so. But due to the resulting arms race, society as a whole actually overconsumes education.
At least, that's my vague memory. Maybe you've got an opinion on this? Or pointers to evidence showing increased spending on education leading to better outcomes?
Hey Kev-
I interpreted the gains as coming from productivity, but you're right there could be signaling effects as well. Weiss (link below) is an accessible source on this.
http://www.csus.edu/indiv/l/langd/Weiss.pdf
Read, in particular, the conclusion. It is a possible outcome of these models that people get too much education, from a social perspective. But (as Weiss notes) this doesn't imply anything about the net social returns to education spending.
Broadly speaking, I'd say it's unresolved how much of the return to education is "productivity" and how much is "signaling". David Card's survey piece on the causal returns to education has some discussion in the conclusion:
http://emlab.berkeley.edu/users/card/papers/causal_educ_earnings.pdf
Regardless, though, making education more available to the poor (who may have a hard time funding even modest investments) can raise their incomes significantly, whether by direct productivity increases or via signaling.
If there is an education arms race (certainly possible) then recent increases in educational attainment have changed the relevant question from "have you completed high school" to "have you completed college."
High school is fully subsidized, so the "signal" that you've completed of high school depends mostly on your ability. College isn't as heavily subsidized, so this "signal" is a combination of ability plus access to resources. There may be people out there with the ability to send the "I completed community college" signal, but who don't have the resources. Their earnings are hampered to the tune of 8% per year.
(And credit markets for human capital acquisition have some problems, since you can't easily repo somebody's skills.)
Scott--
Two more questions, sort of hypothetical...
As government pays to educate the poor uneducated, these people are now able to compete for higher paying jobs. Which then will create additional competition for those jobs, depressing wages or forcing some of the previously more educated to move to new areas for work. Doesn't this create a disincentive for educated tax payers to support these kinds of education programs, despite the social benefits? Or does the number of high paying jobs increase with more education (which doesn't make a lot of sense to me)?
Second, assuming that education increases the number of high-paying jobs and thus the entire population grows wealthier on average, won't this create a need for more lower paying service sector jobs to support the needs of the newly wealthy? These jobs will be filled by more uneducated people moving from other areas (or humanities majors), thus creating a new pool of low-paid, uneducated people that need the government education program to help them grow their income. Am I wrong in thinking this creates a cycle (not sure if its virtuous or vicious) that starts the whole thing over?
The dynamics are kind of fun to think about, I'm curious what your thoughts are...
-rm
emba '09
@rm
I'm wondering if some of the issue is focusing the education correctly. I work in a clinic, and we have a terrible time finding people to fill some of the positions. We have been trying to fill a nursing position without success for 4 years now. The front desk positions require a fair amount of computer knowledge that a lot of people don't have. On the other hand, it does seem like a lot of people are educated to fill jobs that just aren't out there. I don't know what the solution is, but somehow, there needs to be a better match between the actual needs of employers and the potential employees.
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