AN INVESTMENT FOR OUR FUTURE
A Report by the
Council of Economic Advisers and the
Department of Labor
- The educational level -- that is, the number of years of completed
formal education -- of the U.S. workforce has risen, both over the
long-term and over the past twenty years. Test scores have been increasing in
the United States, especially for minorities. At the same time, U.S. students
compare unfavorably to those in many other nations on tests of math and science
- More educated workers earn more, and the gap between earnings of
high school and college graduates has more than doubled over the past 15
years. In 1994, the median full-time worker with at least a bachelor's
degree earned 74 percent more per week than the median full-time worker with
only a high school degree; this figure was only 38 percent in 1979.
- Since education raises the earnings and productivity of workers,
it contributes to overall economic growth. Evidence from cross-country
comparisons generally supports the conclusion that education contributes to
- The weight of evidence indicates that Head Start and other
compensatory preschool education programs improve subsequent school
achievement. Evidence is not yet available to provide a full evaluation of
"school to work" programs, but the initial evidence is favorable.
- Education and training pay off for workers who have already
entered the labor market. Worker training is generally an essential
ingredient of high-performance workplaces.
- Programs that make education cheaper or more available appear to
increase the amount of educational attainment.
EDUCATING AMERICA: AN INVESTMENT FOR OUR FUTURE
Investments in education yield greater dividends today than ever before.
The following is a survey of the overwhelming evidence regarding the benefits
of education to American workers and to our nation's economy, and the
importance of assuring affordable access to higher education.
I. THE EDUCATIONAL LEVEL OF THE U.S. WORKFORCE HAS RISEN IN RECENT
American workers now have more years of formal education than ever
before. Recent years have seen the continuation of three heartening trends.
- First, more students are finishing high school. In 1973, 14.1
percent of 16- to 24-year-olds were high- school dropouts; by 1993, the rate
had fallen to 11.0 percent. Part of this improvement is due to increases in the
graduation rates of African American students, whose dropout rates have fallen
much more sharply than have dropout rates for white students. [See
Second, more high-school graduates are attending college.
Since 1980, the percentage of 18-24 year old high-school graduates who were
enrolled in college has increased from 30.5 percent to 41.6 percent. [See
Chart B] As new workers have
replaced older, less educated workers, the share of the labor force with a
college degree has also increased, from 16 percent in 1973 to 29 percent in
1993. [See Chart C]
Third, total graduate-school enrollment has grown almost as
rapidly as undergraduate enrollment, in percentage terms, over the past two
decades; growth in graduate enrollment for full-time students has been much
faster than in undergraduate enrollment.
The result of these three trends has been a more educated labor force:
average years of education per worker climbed from 11.8 in 1973 to 13.0 in
1990.1 [See Chart D]
Test scores have also risen, although they remain unimpressive by
international standards. Over the past decade, test scores in mathematics,
science, and verbal skills have generally risen for children of almost all ages
and racial and ethnic groups. These test-score gains have been largest among
African American students. Despite the gains, there remains room for further
improvement: U.S. students continue to trail students from most other
industrialized nations on international achievement tests in math and science.
[See Chart E and
II. FORMAL EDUCATION CREATES SUBSTANTIAL ECONOMIC BENEFITS,
FOR THE INDIVIDUAL AND FOR SOCIETY.
More educated workers earn more, and the gap has doubled over the
past 15 years. In 1994, for example, the median full- time worker with at
least a bachelor's degree earned 74 percent more per week than the median
full-time worker with only a high school degree; this gap was only 38 percent
in 1979. The rewards to education and training are one of the most
well-established findings in economics.2 Positive
returns to education and the recent increase in returns have been documented
for a wide rangeof foreign nations, as well as for the United States.3 [See Chart G]
Establishments with higher levels of education have higher
productivity.4 A nationally-representative
survey found that an establishment whose workforce has an average education 10
percent (that is, slightly more than one year of schooling) above that of
similar establishments has productivity about 8.6 percent above similar
Labor demand in high-skill occupations is increasing. Taken
together, the two trends noted above -- the greater numbers of college
graduates, and the increasing earnings gap between college and high-school
graduates -- suggest that demand for higher-skilled workers must have increased
in recent decades. And indeed, occupational evidence supports this view. From
1984 to 1994, whereas employment growth in occupations whose workers have low
levels of education was only 7 percent, employment growth in high-skill
occupations was an impressive 32 percent. The increases in employment in
high-skill occupations presumably would have been even larger if there had not
been an increase in the wages of skilled workers relative to unskilled. [See
There is some debate about the cause of the correlation between
education and earnings. One problem is that people with high ability are
disproportionately likely to receive above- average education, but would also
have been disproportionately likely to receive high wages even if they had not
received so much education. In addition, education can pay off for an
individual because education is a credential that signals high ability, even if
little is learned at school.
Nevertheless, much of the evidence indicates that the economic
rewards to education accrue because schooling actually makes students more
productive as employees, and not primarily because schooling screens out
- One recent study showed that a year of college education
increases earnings by 5 percent to 10 percent, even controlling for family
backgrounds or test scores in high school. This result holds not only for
four-year institutions, but also for community colleges.5
Another study examined identical twins, who obviously share
similar family characteristics and identical genes, and found that each year of
additional schooling raises later earnings of the more-educated twin by about
A third study found that each additional year of schooling
due to compulsory-schooling laws raises earnings by 8 percent (although
statistical problems limit the precision of this estimate).7
III. EDUCATION CONTRIBUTES TO ECONOMIC GROWTH.
New evidence emphasizes that education is an important determinant
of the speed at which the economy as a whole grows. A large body of
literature has shown that countries with the highest initial levels of
education in 1960 or 1965 typically grew the fastest in subsequent
decades.8 One recent study, in trying to pinpoint
just how education makes its contribution, has shown that countries with
better-educated labor forces are better able to take advantage of technologies
developed in other countries;9 this factor is
likely to have contributed to the growth successes of Japan and the East Asian
newly industrialized countries. Sketchier evidence suggests that even within
countries, states and regions with better-educated labor forces grow more
rapidly.10 A well-educated workforce can also
raise the productivity of R&D (for example, because new innovations are
implemented more quickly), encouraging the technological improvements that are
the crucial ingredient in long-term growth.
The cross-country evidence for an education growth effect can best
be thought of as augmenting the other evidence on the returns to education.
The central difficulty with these cross- country analyses is that countries
that "got education right" also got many other things right. That is, countries
with high levels of education tended to be those with high investment rates,
low inflation rates, a strong export orientation, and stable political systems
-- all of which are believed to contribute to growth. As a result,
disentangling these factors to determine which of them has contributed most is
no easy matter. Still, most growth economists believe that in combination with
other factors, education plays an important role.
Educational improvements have contributed significantly to postwar
economic growth in the United States. If we accept the proposition that
more educated workers are paid more because their education makes them more
productive, then we can estimate education's growth effects directly by
measuring increases in the educational attainment of the workforce. Using this
method, the Bureau of Labor Statistics estimates that between 1963 and 1992,
improvements in education added 0.3 percentage points per year to the growth
rate of GDP -- meaning that education accounted for about 20 percent of
per-capita income growth over that period. This estimate depends crucially on
the assumption that the earnings effects of education equal its effects on the
economy's productivity. To the extent that returns to education are associated
with credential screening and signalling, then 0.3 percentage points is an
overestimate; but if education has positive spillovers, then the actual
contribution of education may be even greater. Training and on-the-job learning
also contribute to economic growth, although we have no estimates of the
magnitude of these effects.
Educational improvements for lower-skilled workers can help ensure
that they benefit fully from economic growth. Factors that contribute to
growth, such as technological advancement and increased trade, sometimes
benefit higher-skilled workers disproportionately. The computer advances of
recent years, for example, have probably contributed to economic growth while
simultaneously shifting labor demand toward the high-skilled workers who can
best use the new technologies. To keep lower- skilled workers from being left
behind by growth, it may therefore be necessary to increase their levels of
education and training.
IV. LEARNING THROUGHOUT THE LIFE CYCLE HAS HIGH PAYOFFS.
Head Start and other compensatory pre-school programs have
substantial economic payoffs. Pre-school programs, such as Head Start, can
give a persistent boost to academic achievement. Compared with other students
with similar characteristics, graduates of Head Start-style programs are less
likely to be held back in school, less likely to be classified as
special-education students, and more likely to graduate from high school. As a
result, the program appears to yield net benefits not only for participants but
also for the taxpayer.11 Critics of Head Start-
style programs have noted that although the programs substantially increase the
IQ test scores of participant children relative to non-participants, this
test-score advantage disappears by the end of grade school. But studies that
have looked beyond this narrow measure of intelligence show that despite the
erosion of IQ test-score effects, these programs do raise future academic
School-to-work programs can improve student outcomes. Recently,
substantial governmental efforts have been devoted to strengthening the link
between high schools, community colleges, and the workplace. Although these
efforts are in many cases too recent to have produced results that can be
evaluated rigorously, preliminary results are encouraging. For example,
California's vPartnership Academies, which combine high-school education with
career-focused training and work experience, have apparently been quite
successful in reducing dropout rates among program participants.12 More definite results are available for established
programs targeted at high-school dropouts, such as the highly successful Center
for Employment Training in San Jose.
Education and training for experienced workers have economic
benefits as well. One recent study concluded that each year of education
provided through a Pennsylvania program for older displaced workers increased
earnings by some 7 percent.13 And a recent study
of the Job Training Partnership Act, a Federal program providing training for
economically disadvantaged clients, found that participation increased the
earnings of adult males by 10 percent and the earnings of adult female
participants by 15 percent. These earnings gains were one and a half times
greater than the costs invested to produce them.14
[See Chart I]
Firm-provided vocational training has positive economic impacts for
participants and employers. For workers, a year of either on-the-job or
formal training raises wages by about as much as a year of college
education.15 There is also evidence that
firm-provided training leads to productivity gains. A survey of small
manufacturing firms in Michigan that received training grants from the state
government found that the additional training provided by manufacturing firms
significantly raised productivity.16 Another study
of formal training programs in manufacturing firms found that firms that
introduced training programs in 1983 had productivity growth that was 19
percent faster, on average, than at other firms.17
Some evidence suggests that training is most effective when
combined with other innovative workplace practices. In practice, companies
that train their workers well tend also to have adopted other innovative
practices -- for example, pay systems that reward productivity, as well as
management structures that give frontline employees the ability to suggest and
implement improvements in the product and workplace.18 Several studies suggest that taken together, these
policies are particularly effective.
Evidence of the effectiveness of these human-resource practices comes
from a variety of industries. In manufacturing, a multiyear study of steel
finishing lines showed that plants using highly innovative human-resource
management systems (i.e., that had incentive-based pay and employee involvement
as well as training) had the highest productivity: these plants were in
operation 98 percent of scheduled time, compared with only 88 percent of the
time at companies with traditional work practices.19 Another study concluded that high-involvement steel
minimills not only excel in quality and productivity but also enjoy lower
employee turnover.20 Moreover, these results are
not unique to the steel industry. A comparison of productivity in several
industries in the U.S., Germany and Japan found that adopting best-practice
production processes generally required extensive worker training.21 A worldwide study of the automobile industry found that
a coordinated change to an involvement-oriented human resource system can
simultaneously improve product quality and productivity.22 Studies of the electrical components industry and of
companies with flexible manufacturing systems have found similar
Although most of the detailed studies are in manufacturing, these
policies also appear to yield benefits in service industries. One study of 850
publicly held service companies discovered that these work practices correlated
with a significant reduction in employee turnover and with 16 percent higher
sales per employee (controlling for capital per worker and research and
development spending), higher annual cash flow, and increased market value of
V. FAMILY INCOME AND TUITION COSTS AFFECT EDUCATIONAL
Borrowing constraints mean that college costs may have a
particularly large effect on educational attainment. If capital markets
functioned perfectly, any student for whom the expected returns to education
were greater than the interest rate would be able to borrow enough to cover
tuition and living costs. Thus low- and high-income students with similar
abilities would be expected to enroll in college at similar rates. But in
practice, future earnings are far less effective as collateral than are
physical assets such as houses. As a result, before federal guarantees,
students could not generally borrow enough to cover the costs of education.
Thus college costs matter more than they should: even when costs are low enough
to make education a good investment for a low-income student, they may be too
high for him or her to stay in school. A variety of evidence suggests that by
easing the borrowing constraint, government can substantially increase
Lower college tuition leads substantially more students to enroll
in college. The net cost of college education appears to have a substantial
impact on the likelihood of college enrollment for low-income students. For
example, one recent study has found that students from states with low
public-university tuition levels are more likely to attend post-secondary
education than students from other states, even after controlling for a wide
variety of other factors that could cause this difference.25 The effect is stronger for low-income students than for
high-income students, consistent with the hypothesis that borrowing constraints
do indeed constrain educational attainment.
Government aid can also play an important role in driving down the
cost of college, and thus inducing more students from low-income families to
attend. For a variety of reasons, students from low-income families may be
particularly averse to taking on the high level of indebtedness associated with
borrowing for college. Consistent with this, there is a substantial amount of
evidence that for low-income students, the availability of grant aid strongly
increases the likelihood of participation in further education.26
The low levels of educational attainment of low-income students
(caused both by borrowing constraints and by other risk factors) are costly in
terms of lost future productivity. For poor children, rates of school
completion and advancement to post- secondary education are much lower than for
other children. For example, children who experience poverty between the ages
of 6 and 15 years are two to three times more likely to drop out of high school
than are students who never experience poverty. A recent study commissioned by
the Children's Defense Fund, which added up the costs of low educational
achievement for the 14.6 million poor children in 1992, estimated that each
year that these children spend in poverty costs the economy somewhere between
$36 billion and $177 billion in reduced future productivity and employment.
(Again, these estimates assume that the productivity benefits of a year of
education are as large for poor students as they are for the average student.)
A quality education is a key determinant of an individual's future
economic well-being and is a critical ingredient for this nation's future
economic health and strength. The evidence on this score is overwhelming.
- The economic returns to education for America's working men and women
have risen dramatically. In 1979, the median full-time worker with at least a
bachelor's degree earned 38 percent more per week than a worker with only a
high school degree. By 1994, that difference had grown to 74 percent.
- Since education raises the earnings and productivity of workers, it
contributes to overall economic growth.
- The evidence shows that compensatory preschool education programs
such as Head Start improve subsequent school achievement. The evidence is not
yet available to provide a full evaluation of "school to work" programs, but
the initial evidence is favorable.
- Education and training pay off for workers who have already entered
the labor market. Worker training is generally an essential ingredient in the
adoption of high performance workplaces.
- Programs that make education cheaper or more available appear to
increase the amount of education.
In the words of Benjamin Franklin: "An investment in knowledge pays
the best interest."
Given the strong evidence pointing to the positive impact that
education has on the lives of American workers and our economy, our nation must
renew its commitment to these investments. Abandoning our commitment to
education -- especially at a time when the future standard of living for
American workers and the strength of the American economy depends on an
educated workforce -- is shortsighted and could have long- term damaging
consequences to this nation's economic health and strength.
1 U.S. Department of Education, National Center
for Education Statistics, Digest of Education Statistics, 1994; and U.S.
Department of Labor, Bureau of Labor Statistics, Labor Composition and U.S.
Productivity Growth, 1948-90, December 1993.
2 Willis, Robert, "Wage Determinants: A Survey
And Reinterpretation of Human Capital Earnings Functions," in Orley Ashenfelter
and Richard Layard, eds., Handbook of Labor Economics, Volume I, Elsevier
3 Psacharopoulos, George, "Returns to Education:
A Further International Update and Implications," Journal of Human Resources,
Volume 20, Fall, 1985; and Freeman, Richard B., and Lawrence Katz, "Rising Wage
Inequality: The United States vs. Other Countries," in Freeman, Richard B.,
ed., Working Under Different Rules (New York: Russell Sage Foundation), 1994.
4 Lynch, Lisa, "The Other Shoe: Characteristics
of Human Capital Investments and their Pay-offs to Employers," working paper,
National Center on the Educational Quality of the Workforce, University of
5 Kane, Thomas J. and Cecilia Rouse, "Labor
Market Returns to Two and Four-Year College: Is A Credit a Credit and Do
Degrees Matter?", American Economic Review, Vol. 85, No. 3, pp. 600-14 (1995).
6 Ashenfelter, Orley, and Alan B. Krueger,
"Estimates of the Economic Returns to Schooling From a New Sample of Twins,"
American Economic Review, December 1994. Other studies of twins have found
smaller, but still positive, effects.
7 Angrist, Joshua and Alan Krueger, "Does
Compulsory School Attendance Affect Schooling and Earnings?," Quarterly Journal
of Economics, Vol. 61, No. 4, November 1991.
8 See, for example, Barro, Robert J., "Economic
Growth in a Cross Section of Countries," Quarterly Journal of Economics, Volume
106, May 1991; and Mankiw, N. Gregory, David Romer, and David Weil, "A
Contribution to the Empirics of Economic Growth," Quarterly Journal of
Economics, Volume 107, May 1992.
9 Benhabib, Jess, and Mark M. Spiegel, "The Role
of Human Capital in Economic Development: Evidence from Aggregate Cross-
Country Data," Journal of Monetary Economics, Vol. 34, 1994.
10 Holtz-Eakin, Douglas, "Solow and the States:
Capital Accumulation, Productivity, and Economic Growth," National Tax Journal,
Vol. 46, No. 4, 1993.
11 Barnett, W. Steven, "Benefits of
Compensatory Preschool Education," Journal of Human Resources, Vol. 27, No. 2,
12 Hayward, Becky, and G. Tallmadge, Evaluation
of Dropout Prevention and Reentry Projects in Vocational Education, draft final
report, Research Triangle Institute, November 1993; and Stern, David, et al.,
"Benefits and Costs of Dropout Prevention in a Program Combining Academic and
Vocational Education: Third- Year Results from Replications of the California
Peninsula Academies," Educational Evaluation and Policy Analysis, Vol. 11, No.
13 Jacobson, Louis, Robert LaLonde, and Daniel
G. Sullivan, "The Returns to Classroom Training for Dislocated Workers,"
unpublished manuscript, September 1994.
14 Bloom, Howard S., et al., The National JTPA
Study: Overview of Impacts, Benefits, and Costs of Title II-A, Abt Associates,
15 Lynch, Lisa, "Private Sector Training and
the Earnings of Young Workers," American Economic Review, Vol. 82, No. 1.,
16 Holzer, Harry et al., "Are Training
Subsidies for Firms Effective? The Michigan Experience," Industrial and Labor
Relations Review, November 1993.
17 Bartel, Anne, "Productivity Gains from the
Implementation of Employee Training Programs," Industrial Relations,
18 U.S. Department of Labor, High Performance
Work Practices and Firm Performance, 1993; and Levine, David I., Reinventing
the Workplace: How Business and Employees Can Both Win (Brookings, 1993).
19 Ichniowski, Casey, Kathryn Shaw, and
Giovanna Prennushi, "The Effects of Human Resource Management Practices on
Productivity," unpublished manuscript, March 1994.
20 Arthur, Jeffrey B., "Effects of Human
Resource Systems on Manufacturing Performance and Turnover," Academy of
Management Journal, Vol. 37, No. 3, 1994.
21 Baily, Martin Neil, and Hans Gersbach,
"Efficiency in Manufacturing and the Need for Global Competition," Brooki
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