A Close Link Between the Educational Attainment and Earnings of a Nation - Essay Example

Introduction The economics of education suggests that education has the potential to improve the economic development of a nation. The human capital theory can very well be applied to the economics of education as it holds that human capital is essentially an investment that can trigger of Gross Domestic Product of a nation, thereby causing development to the economy. Researches and studies have proved that there is a close link between educational attainment and earnings of the citizens of a nation. The essay tries to find out how far educational attainment results in per capita income or earnings making use of the human capital theory as the basis of the analysis. Economics of Education One needs to have a thorough understanding of the concept of the economics of education to study about the relation between educational attainment and earnings. The economics of education maintains that education is ‘investment in human capital’; it means that education increases the productivity of the citizens of a nation and thereby it increases the GDP rate of the nation. Poor nations tend to display poor levels of education whereas the human capital rate is higher in developed nations just as their educational attainment is higher. However, the educational attainment of a nation is not the sole criterion for its economic growth; nations like India and Egypt has greater levels of educational attainment but they lack ‘a climate for growth’ (Vaizey 1962 p. 127). According to John Vaizey (1962), education plays three basic roles in contributing growth to the economy: “One is to supply skilled manpower and technicians without whom physical capital would be wasted. The second is to generate 'a climate for growth' by giving the masses a capacity for thinking beyond their immediate needs and troubles. The third is to teach the cultivators simple and elementary rural skills which will yield a small surplus over subsistence consumption and which can be the basis for physical accumulation”(p. 127). Human Capital Theory and Economics of Education Human capital is defined as the “knowledge, information, ideas, skills, and health of individuals” and consequently “the economic successes of individuals, and also of whole economies, depends on how extensively and effectively people invest in themselves. (Becker p. 3). Human capital theory holds that “personal incomes vary according to the amount of investment in human capital; that is, the education and training undertaken by individuals or groups of workers. A further expectation is that widespread investment in human capital creates in the labour-force the skill-base indispensable for economic growth” (Marshall 1998). Studies have proved that there is a close link between the human capital and the economic growth of a nation. The human capital theory purports that “the relative contribution of individuals to growth depends on their human capital – the knowledge, skills, competencies and other attributes that are relevant to economic activity” (The contribution of literacy to economic growth and individuals’ earnings 2008) and no doubt, the level of educational attainment better equip one to contribute to the economic growth of the nation in terms of human capital. Individuals with higher education prove to be more productive in terms of human capital and are more likely to earn more than those who are uneducated or undereducated; therefore, one can establish that there is a direct link between human capital and earnings. Muchin and Vignoles make clear the relation between human capital theory and the economics of education. The authors conceive education to be an investment good that is capable of returning earnings and profit. For them, “Individuals invest in human capital, such as schooling, because human capital makes a person more productive and this gain in productivity is reflected in higher wages. Thus it is argued that individuals primarily make investments in schooling and other forms of human capital to earn a return, i.e, to increase their income in the future” (Muchin and Vignoles 2005 p.4). Using the data from IALS, a recent study found out that “investment in human capital, that is, in education and skills training, is three times as important to economic growth over the long run as investment in physical capital, such as machinery and equipment. The results also show that direct measures of human capital based on literacy scores perform better than years-of-schooling indicators when explaining growth in output per capita and per worker” (The contribution of literacy to economic growth and individuals’ earnings 2008). Human Capital Theory and the link between educational attainment and earnings There is a vast number of literature that explicitly highlight the relationship between educational attainment and earnings. Rose and Betts (2001) believe that “schooling increases the productivity of soon-to-be-workers” and for them the human capital theory assert that “curriculum has economic value because it imparts skills to students that make them more productive and therefore better rewarded in the labour market” (p. 17) Robert Barro and Jong-Wha Lee have made some remarkable studies on the relation between human capital and economic growth and the major finding of the study is that “the educational attainment of a country's adult population is strongly positively related to that country's subsequent growth rate of per capita gross domestic product (GDP)” (Katz p. 217) and they identified that a 10 percent increase in educational attainment can result in an increase in the growth rate of 0.2 percent a year. The authors conclude that educational attainment has a direst control over the rate of physical capital investment. The cross country data collected by the researchers clearly emphasize the fact that human capital and physical capital investment go together and both of them can trigger national economic growth. The researchers also point out that there are ample micro and macroeconomic evidence that “Schooling appears to increase productivity and earnings at the individual level, and thus can plausibly be related to increased growth at the national level” (Katz p. 221). It means that countries that invest heavily on education are more likely to receive greater returns which will be reflected in the economic growth of the nation. As pointed out by Gary S. Becker, ““The global economy cannot succeed without considerable investment in human capital by all nations. Richer countries specialize in high-knowledge products and services, while poorer nations specialize in lower-skilled and raw material– intensive products” (Becker p. 5). With the increased growth of globalization, man power or human capital has economic value at the international level; highly skilled and talented professionals are more likely to receive higher salaries in accordance with their educational level. However, it is not always possible to calculate the skills of individuals based on their educational level only; thus, highly skilled personnel who lack formal educational qualifications are also likely to climb the ladders of economic stability and human power capital. It can thus be concluded that the skills and talents of the individual can also come under the scope of human capital and as J.B. Say (1821) asserts since skills and abilities are acquired at a cost and tend to increase worker productivity they should be regarded as capital (Say, 1821: 92-94). In this respect, along with formal education skills, vocational training and both off and on -the job training form means of achieving earnings and thus can come under the scope of the economics of education. Thus it can be concluded that education, skills and human capital are interchangeable concepts when it comes to the economics of education. Similarly, investing in education should be done envisioning the prospectus of the expected return and those skills and fields that have more capital value are to be promoted. Engelbrecht (2003) provides a clear cut picture of the link between human capital and economic growth among OECD (Organization for Economic Co-operation and Development) countries. He makes a distinction between the 'Nelson-Phelps [NP] approach' and the 'Lucas approach' behind the interchangeable relation between the two. The 'Nelson-Phelps [NP] approach, for him, deals with the “growth to the stock of human capital through two channels, i.e. directly through human capital's effect on a country's ability to innovate (the domestic innovation component), and indirectly through its ability to facilitate technology adoption, i.e. to foster technology 'catch-up' with the leading country (the technology diffusion component)” (Engelbrecht 2003). One can never undermine the significance of technological development in the economic growth of a nation; however, the significance of human capital in the modern economy is unparallel. This is very well observed by Nobel Laureate Becker (2002) when he states: “Technology may be the driver of a modern economy, especially of its high-tech sector, but human capital is certainly the fuel” (Becker p.3). It is thus evident that the educational system of the nation should be so well-designed to meet the changed needs of the time and educational policies should be so adapted so as to meet the demands of human capital in various fields of knowledge The approach also highlights the need for equipping the man power of the nation with all the immense possibilities of information system and educational technology in the provision of quality education. Thus, it can be concluded that there should be constructive changes in the educational policies from time to time and that there is a direst link between the quality of education offered and the productivity of the human capital. The approach also points to the need of having advanced infrastructural facilities and technological devices in the teaching –learning process. The 'Lucas approach', on the other hand, “treats human capital like an ordinary input in the production function. Changes in growth rates across countries are assumed to be primarily due to changes in the rates of human capital accumulation” (Engelbrecht 2003). The approach emphasizes the need to improve the basic educational level in the nation and for this the services of skilled and competent teachers is an essential prerequisite. Angel de la Fuente (2006) rightly identifies that the modern economy is a ‘globalized knowledge economy’ which necessitates from the part of the human capital power “a greater ability to learn, produce new knowledge and adapt to change” and he is of the opinion that a highly qualified “educated labour force will also be able to achieve faster productivity growth, both through gradual improvements in existing production processes and through the adoption and development of more advanced technologies, and should be in a better position to respond flexibly to rising worldwide competition”(Fuente 2006 p.9). Thus educational policies need greater adaptability and vision to accommodate human capital who can apply their specialized knowledge and skills for the production of increasingly complicated goods and services. Thus, the modern economy needs the services of specialized human power who are capable of generating new ideas and adapt themselves to the changing economic environment. One can thus come to the conclusion that low levels of educational attainment results in low levels of human capital which can adversely affect the economic growth of an economy. To sum up the discussion on the literature, it has been pointed out by many researchers that “a highly skilled and educated workforce tends to be more productive and thus earn higher wages” and that “the richer and more advanced countries tend to be characterized by higher levels of literacy and educational attainment” (Low, Audrey., et al.2004. p.1). Having gone through the major literature on the link between educational attainment and earning, it is necessary to deal with the possible statistical data on the question. The potential earning of individuals go higher as the level of education attainment increases. A person who completes hid graduation is more likely to earn than a person who leaves his studies after his/her school level of education (See Appendix 8). The international level comparisons of educational attainment at the tertiary and upper-secondary levels reveal that U.K has the highest level of tertiary education (15%) whereas, the rate is just above 13% for the United States (Education at a Glance, 2003-Appendix 7). However, when it comes to the upper secondary educational attainment the United States has a slightly higher rate than that of the United Kingdom. The table also shows that France has a comparatively higher level of tertiary education (13%), even though its upper-secondary level of education is comparatively low (6%). The statistics is significant for the United Kingdom as an increase in the tertiary level of education is most likely to increase its human capital power. Appendix 6 makes an international comparison of the skills profiles of USA, Japan, Germany, United Kingdom, and France. Germany has the highest level of intermediate human skills (59%), USA and Japan maintains the greater high level skills (49 and 47 respectively), and USA has the lowest rate of low human skills (11%). The United Kingdom maintains the closest ratio of skills between the low level and intermediate level skills (30-40), whereas the high level skills of the nation need to be improved. On the other hand, it is evident from Appendix 6 that the proportion of qualified personnel in U.K has been at an increasing rate from 1996 to 1999. In 1996, the proportion rate was below 0.3 proportions whereas it has increased immensely above 0.6 by the year 1999. From 1987 to 1999, one can notice a steady and progressive in the proportional rate of the qualified pool in U.K even though there had been some up and downs prior to that. These statistics point to the growing need and demand for educational attainment in the United Kingdom and no doubt the nation has been benefited very much with this growing level of educational attainment. It is interesting to note that the proportion of girls achieving 5 good GCSEs is much higher to that of boys who do so. From 1975 to 1967, the difference between both the genders is considerably low, even though girls stand at a higher rate. However, from 1967 onwards there is a steady growth in the achievement of girls. In 1967, the proportion of both boys and girls who achieved 5 good GCSEs nears 35% whereas there is a considerable difference by the year 2003: the proportion of boys is just below 50% whereas for the girls it is close to 60% (Appendix 4). However, when it comes to the weekly earnings by qualification males prove themselves to be much above the females. The statistics show that among degree holders the weekly earnings of males come close to 500 whereas the earnings for the females is only 320 (Appendix 3). The data from the Labour force Survey also reveals that in all the grade levels the earnings of males stand higher to that of females. Thus, the statistics point to the fact that even though the number of women having educational attainment is higher they are not provided with ample opportunities for earning like their counterparts, the males. With the realization that human capital has the potential to make the nation economically stable, world nations have started to invest heavily in education and Appendix 2 offers the statistical data on the percentage of the total public expenditure spent on tertiary education in 1999. Denmark, Mexico, Finland and Norway stand at the top with a percentage in and around 4.5. The United Kingdom has spent only below 3% on tertiary education; however, it is clear from Appendix 7 that U.K has the highest rate of tertiary education (15%). This points to the effectiveness of the tertiary educational level achievement of U.K. Similarly, Appendix 1 also shows the importance given by the U.K to higher education. The percentage of initial public fund for higher education provided by the U.K amounts to 100%, whereas it is only 94% for Italy, 91% for France, 80% for Japan, 56% for Canada and 38% for the United States in their central regions. Conclusions The conclusions of the study are as follows:- 1. There is a close link between the educational attainment and earnings of a nation 2. High level of educational attainment results in better human productivity and it increases the potentiality of human capital as an investment 3. Nations with higher levels of educational attainment are more likely to achieve economic development than those who do not. 4. Human capital also includes the skills and non-academic talents of individuals 5. The economics of education has strong roots in the human capital theory that holds that man power is superior to technological developments 6. In order to maintain high level of earnings from education, the quality of education needs to be maintained and there should be governmental public funding and effective policies for the same. Bibliography Machin, Stephenand Vignoles, Anna. 2005. What's the Good of Education?: The Economics of Education in the UK. Princeton University Press. The contribution of literacy to economic growth and individuals’ earnings. 2008. Statistics Canada. http://www.statcan.gc.ca/pub/81-004-x/2004006/7780-eng.htm (accessed on 10 Jan. 09) GORDON MARSHALL. "Human-capital theory." A Dictionary of Sociology. 1998. Retrieved January 06, 2009 from Encyclopedia.com: http://www.encyclopedia.com/doc/1O88-Humancapitaltheory.html (accessed on 10 Jan. 09) Rose, Heather and Betts, Julian R. 2001. Math Matters: The Links Between High School Curriculum, College Graduation, and Earnings. Public Policy Instit. of CA. Katz, Lawrence F. Commentary: Human Capital and Economic Growth. http://www.kansascityfed.org/publicat/sympos/1992/s92katz.pdf (accessed on 10 Jan. 09) SAY, J-B. (1821), A Treatise on Political Economy, Vol. I, Translated by C. R. Prinsep, Boston: Wells and Lilly. FEP Working Paper no. 121, November 2002 Vaizey ,John. 1962. The Economics of Education. Faber and Faber: London. Engelbrecht, Hans-Jurgen. 2003. “Human Capital and Economic Growth: Cross-Section Evidence for OECD Countries”. Economic Record. 79.245. Ps 40+. Fuente, Angel de la. Education and economic growth: a quick review of the evidence and some policy guidelines. 20 September 2006. Economic Council of Finland. http://www.vnk.fi/hankkeet/talousneuvosto/tyo-kokoukset/globalisaatioselvitys-9-2006/artikkelit/De_la_Fuente_06-09-20.pdf (accessed on 10 Jan. 09) Becker, Gary S. The Age of Human Capital. http://media.hoover.org/documents/0817928928_3.pdf (accessed on 10 Jan. 09) Audrey Low, Sam Ouliaris, Edward Robinson and Wong Yuet Mei. Education for Growth: The Premium on Education and Work Experience in Singapore. MAS Staff Paper No. 26. Monetary Authority of Singapore. January 2004. http://www.mas.gov.sg/resource/publications/staff_papers/StaffPaper26.pdf (accessed on 10 Jan. 09) Appendices Appendix 1 Appendix 2 Appendix 3 . Appendix 4 Appendix 5 Appendix 6 Appendix 7 Appendix 8 Read More