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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Earmarking Justice

by Justine Doody
Freelance Journalist and Editor, SGI News

In his State of the Union address on 12 February 2013, US President Barack Obama proposed a new initiative to improve access to high-quality early childhood education. The action is much needed: according to OECD figures from 2010, only 51 per cent of US children were enrolled in pre-primary education at age three, rising to 69 per cent at age four.

By comparison, in New Zealand, which became in 1986 the second country in the world to have its ministry of education take responsibility for early childhood education, 95 per cent of children in 2012 had been through an early childhood education programme before starting school at five years old.

Early childhood education is linked to improved prospects for future learning and employment. And, as the new Intergenerational Justice Index (IJI) study from the Bertelsmann Foundation's Sustainable Governance Indicators (SGI) project shows, it can help to level the playing field in terms of allocating resources fairly between older and younger generations.

As demographic changes lead to ageing populations in many OECD countries, the increased weight of older people in voting systems means they have more power than ever before to direct policy preferences. So, more than ever, it is important that countries take steps to ensure their policies provide future generations with at least the same chances that their parents and grandparents had.

Estonia Ranks Top, the United States Bottom

To find out which countries best provide for younger and future generations, SGI's Intergenerational Justice Index (IJI) measured OECD countries on several indicators: ecological footprint, child poverty, public debt per child and spending bias towards older generations.

The best performing country, SGI found, was Estonia, while New Zealand achieved a creditable fourth place. The United States ranked bottom of all the 29 countries studied, followed by Japan and Italy. If these countries do not change their current policy directions, their young people will grow up facing burdens of injustice, in terms of public debt, ecological degradation, and social immobility, that will be difficult, if not impossible, to overcome.

IJI offers policy recommendations that could help to shift the balance and help countries to improve their levels of intergenerational justice. The study suggests intergenerational earmarking as a way to rebalance public spending towards the young. Revenues raised in addressing one form of intergenerational justice, for example, environmental taxes, could be used to mitigate other areas of injustice, for instance by offering child tax credits or family allowances.

Proxy Votes for Children Could Foster Intergenerational Justice

Another interesting, albeit potentially controversial, recommendation is the introduction of proxy voting for children. Parents would be given the right to vote on behalf of their children, with a child's vote equalling one-half of an adult vote. In this way, children would be given a voice in politics, and parents would be rewarded for their societal contribution.

High-quality early childhood education is especially important. Research has found that children who participate in early childhood programmes are more likely to graduate from high school, hold down jobs, and earn more money. They are less likely to find themselves on state welfare or to go to prison.

The experience of high-quality early childhood education particularly benefits children from disadvantaged backgrounds, which means that providing early childhood programmes could work as a corrective social justice measure as well as an intergenerational rebalancing.

In New Zealand, beginning in 2007, three-year-olds were offered two free years of pre-school. Children attend programmes for 20 hours a week, 48 weeks of the year. The government hopes that by 2016, 98 per cent of children will receive early childhood education.

But despite this excellent record, there are concerns about the programme's future. Education unions complain that funding cuts are affecting the quality of early childhood education. Recently, the word 'free' was removed from the government strategy; now, almost half of early childhood education providers, hit by increasing costs and lower subsidies, are asking for extra fees from parents. Shifting costs onto parents could limit the availability of high-quality education for disadvantaged families.

Prospects for the US Seem Bleak

The US government says that in the United States, only 3 in 10 four-year-olds have access to high-quality early childhood education programmes. Socio-economically disadvantaged children are least likely to be in early childhood education programmes: just 59 per cent of the poorest US children are in pre-kindergarten, as compared to 90 per cent of children from wealthier homes. The president's programme is to implement free access to high-quality pre-school for all four-year-olds from families at or below 200 per cent of the poverty line.

To receive federal funding, states would have to meet strict requirements. All teachers must have a bachelor’s degree and be given access to on-going professional development. Teachers’ salaries should be comparable to those for teachers in higher levels of the education system. Class sizes should remain small and activities should cover the entire school day. Curricula should measure up to state standards and programmes must be continuously evaluated. As it stands, few states would be able to meet these strict standards and qualify for federal money.

However, it is unclear how the US programme would be financed. The president’s 2014 budget proposal includes a plan to pay for universal preschool by increasing taxes on cigarettes, which could have positive public health outcomes as well as providing a revenue stream for the programme. But even if the tax succeeded in getting past the vested interests that would oppose it, such “sin taxes” have diminishing returns over time, raising questions about future funding.

Any new federal funding is supposed to be matched by state funding. But because of budget constraints, many states have already cut funding for their existing early childhood education programmes, casting doubt on their willingness to provide more dollars for a new federal initiative.

And the larger, on-going struggle between those who wish to cut government spending in the name of austerity and those who favour Keynesian expansion seems to be resolving itself in favour of the budget-cutters.

So, even in the face of the overwhelming evidence that early childhood education has economic benefits that go beyond the moral claims of social and intergenerational justice, the future of the US initiative is uncertain. Absent new will to act from both sides of the US political divide, the prospects for the United States improving its dismal rating on intergenerational justice seem bleak.

Links
Find out more on OECD work on Early Childhood Education and Care
Education at a Glance 2012
Starting Strong; Starting Strong II; Starting Strong III
Doing Better for Families
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