Education: The best protection against an economic crisis

by Dirk Van Damme
Head of the Innovation and Measuring Progress division, Directorate for Education and Skills

The insight that education is valuable both to individuals and to countries is not new. Using continuously improving data and statistical tools, we have come to understand and appreciate the magnitude of education’s impact on employment, income, health and life opportunities in general. From a purely economic point of view, private returns on investment are well beyond 10% per year, and public returns are only slightly below that figure. Fears that increasing participation and greater numbers of graduates – resulting in ever-increasing numbers of highly qualified people in the work force – would result in some kind of inflation, in diminishing returns and burgeoning graduate unemployment could not be confirmed by the data.

When the financial crisis erupted in 2007-08, rapidly turning into a global economic recession and a fiscal crisis in the Euro-zone and other countries, it was very difficult to predict its impact on education. Data for the years 2008 and 2009 showed that in the first years of the crisis, the impact on education remained limited and was confined to countries in severe crisis, such as Ireland, Iceland and Greece. Education is generally protected from shocks to the economic system because of its intrinsic slow pace of change. Individuals and families did not drastically alter their patterns of participation in education; and in the first years of the crisis, governments used stimulus packages and deficit spending to try to soften the blow, leaving education budgets more or less untouched. But we know that things started to change dramatically from 2010 onwards, when unemployment – especially among youth – climbed steeply and governments turned into austerity mode.

Education at a Glance 2013, the OECD’s reference on education indicators and statistics, for the first time provides a comprehensive set of data covering the years 2010 and 2011. The data convey a consistent, but also somewhat surprising picture. A great deal of the economic and social hardship caused by the crisis fell chiefly on less-educated individuals. The unemployment gap between well-educated young people and those who left school early widened during the crisis. On average across OECD countries, 5% of those with a tertiary education were unemployed, against 13% of those without an upper secondary education. Between 2008 and 2011 the unemployment rate for the latter group increased by 4%, while it rose by only 1.5% among the highly educated. The earnings gap widened as well: the average difference in earnings between highly educated and low-educated individuals grew from 75 percentage points to 90 percentage points between 2008 and 2011.

The message is clear: it is a person’s education that determines whether he or she will be extremely or only moderately exposed to the economic and social risks in times of crisis. Those without a minimal level of education, and certainly those of them without a stable job, find themselves without any shelter from the storm. Meanwhile, the relative returns on higher education increase. Some might argue that this is largely due to structural changes in the labour market: highly educated people taking the jobs of the middle-educated individuals, who, in turn, drive low-educated workers into unemployment. The earnings data do not seem to confirm this hypothesis: if tertiary-educated individuals were to take medium-skilled jobs en masse, their relative wage premium would not have increased as much as it did. In addition, the wage premium increases with age, which suggests that the higher level of skills among tertiary-educated workers is compensated in their salaries. In times of crisis and tough competition in the labour market, employers would certainly not be willing to value skills as much as they seem to do if there was no good reason to.

In short, the value of education increases during an economic crisis. Those who lack education, stand to lose a lot; those who have invested in it, can still reap its benefits.

Links:
For more information, and to download a copy of the book, visit the Education at a Glance website at: www.oecd.org/edu/eag.htm

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Higher education: a good long-term investment?

by J.D. LaRock

Senior Analyst, Innovation and Measuring Progress Division, Directorate for Education

As any student can attest, pursuing a higher education requires an investment in time, effort – and in a number of OECD countries, significant financial resources.  But the economic costs of higher education go beyond tuition fees.  Because people with higher education tend to have higher earnings, they’re likely to pay more in income taxes and social welfare contributions.  There’s also the “opportunity cost” of foregone earnings when people enter university instead of the labour market.

Given these long-term economic costs, do the long-term economic benefits of having a higher education make it worthwhile?  As the latest issue of the OECD’s brief series Education Indicators in Focus details, analyses based on the most recent year of available data – 2007 for most countries – suggest that the return on investment is very good.

For example, the long-term economic advantage of having a tertiary degree instead of an upper secondary degree, minus the associated costs, is over USD 175 000 for a man and just over USD 110 000 for a woman, on average across OECD countries. The payoff is particularly strong for men in Italy, Korea, Portugal and the United States, where obtaining a higher education degree generates a long-term benefit of more than  USD 300 000 for the average man, compared to a man with an upper secondary education only.

Meanwhile, the advantage for women is strongest in Ireland, Korea, Portugal, Slovenia, the United Kingdom, and the United States, where having a tertiary education yields an average long-term benefit of USD 150 000 or more, compared to a woman with an upper secondary education.

As the chart above shows, OECD analyses also find that the long-term payoff on the amount of taxpayer funds used to support people in higher education generates a strong return.  Taxpayer costs include funds used to lower the direct costs of higher education to individuals, as well as support for grant and loan programs.  They also include indirect costs, such as foregone tax revenues and social contributions to the government while people are in university.

On average, OECD countries directly invest more than USD 30 000 in public sector funds to support an individual pursuing higher education.  However, they’ll recoup this investment – and then some – through greater tax revenues from these higher-educated people, as well as savings from the lower level of social transfers these people typically receive.

On average, OECD countries will receive a net return of USD 91 000 on the public costs to support a man in tertiary education – more than three times the amount of the public investment. In Belgium, Germany, Hungary, Slovenia and the United States, this return is especially high, topping USD 150 000.  The net return on the public costs to support a woman in higher education is somewhat lower – USD 55 000, on average – but are still positive in almost every OECD country.

Of course, the fallout from the global economic crisis will likely change this cost-benefit equation – but whether it will make it better or worse overall is unclear. For example, the higher unemployment rates spurred by the crisis are likely to have reduced the opportunity cost of foregoing work in order to attend university.  However, they also may have reduced some of the benefits of having a higher education, because unemployment rates rose among tertiary-educated people during the crisis.

Likewise, the continued global expansion of higher education could have different effects.  As the supply of highly-educated individuals grows, the relative economic benefits of having a tertiary education may go down over time.  However, if economies continue to become more knowledge-based – increasing the demand for highly-educated people even more – the economic benefits of higher education could continue to expand.

For more information

On the OECD’s education indicators, visit:
Education at a Glance 2011: OECD Indicators www.oecd.org/edu/eag2011
On the OECD’s Indicators of Education Systems (INES) programme, visit:
INES Programme overview brochure
See also: IMHE General Conference 2012 "Attaining and Sustaining Mass Higher Education", Paris, 17-19 September 2012


Chart Source: Education at a Glance 2011: OECD Indicators, Indicator A9 (www.oecd.org/edu/eag2011).
Note: Data for Australia, Belgium and Turkey refer to 2005. Data for Italy, the Netherlands, Poland,
Portugal and the United Kingdom refer to 2006. All other data refer to 2007.
Countries are ranked in descending order of the net present value.