Education and Economic Growth go hand in hand. Why do most workers with college degrees earn so much more than those without degrees? How does a nation’s education system relate to its economic performance? Knowing how education and training interact with the economy can help you better understand why some workers, businesses, and economies flourish, while others falter.
Globalization and international trade require countries and their economies to compete with each other. Economically successful countries will hold competitive and comparative advantages over other economies, though a single country rarely specializes in a particular industry. A typical developed economy will include various industries with different competitive advantages and disadvantages in the global marketplace. The education and training of a country’s workforce is a major factor in determining how well the country’s economy will perform.
As the labor supply increases, more downward pressure is placed on the wage rate. If the demand for labor by employers does not keep up with the supply of labor, wages usually fall. An excess supply of workers is particularly harmful to employees working in industries with low barriers to entry for new employees, i.e., they don’t have a degree or any specialized training.
Conversely, industries with higher education and training requirements tend to pay workers higher wages. The increased pay is due to a smaller labor supply capable of operating in those industries, and the required education and training carries significant costs.
Education directly affects economic growth insofar as it is essential to improve human capital. Let’s take this step by step. An economy’s production capacity depends on different factors. These include physical capital, technology and the number of workers, as well as their quality. This quality is largely determined by what is called human capital (the stock of knowledge, skills and habits). An increase in workers’ educational level improves their human capital, increasing the productivity of these workers and the economy’s output.
Numerous studies in the field of labour economics have attempted to measure this relationship between a worker’s education and its productivity, called the private return to education. And the findings have been incredibly positive. The precursor to all such studies is the equation developed by Jacob Mincer in 1974, known as the Mincer Equation.
This relates workers’ earnings (seen as a way of measuring their productivity) with their years of schooling and work experience.1 It goes without saying that equating a worker’s education with their years of schooling is highly flawed since it assumes that, for instance, one additional year of primary education has the same effect on a worker’s productivity as an additional year of university education. Neither does it take into account possible differences in the quality of the education received, particularly relevant for analyses carried out with data from different countries. Some studies therefore distinguish between primary, secondary and tertiary education and add quality controls such as the results from tests carried out internationally.
The knowledge and skills of workers available in the labor supply is a key determinant for both business and economic growth. Industries with higher education and training requirements tend to pay workers higher wages. Differences in training levels is a significant factor that separates developed and developing countries. An economy’s productivity rises as the number of educated workers increases since skilled workers can perform tasks more efficiently.
Thousands of years ago, Confucius said that: “education breeds confidence, confidence breeds hope, and hope breed peace”. To cultivate hope in our next generation, we must develop an education system that is tailored to face the storm of new technology while developing creativity as well as cross-cultural understanding and acceptance.