Education as Investment in Comparative Perspective

Abstract

The central problem in deciding the place of education in the economy is to assess the returns to educational Two main means suggest themselves. The first is based on the assumption that the market mechanism for wages and salaries works, and that the individual who chooses to pay for his son's education is making as rational a choice as the individual who buys stock in a printing business rather than an oil company. In other words, he chooses between discounted net returns on different forms of investment. The second method is a macro-economic one developed in Norway. How far we may take as definitive the use by American scholars2 of the differential rates of return to persons of different educational levels it is not easy to say. Their method is to discount the average returns over a lifetime from certain occupations which are closely correlated with educational origin, and to attribute the excess over the returns to an average worker to the in education. There are a number of difficulties in this approach. First, the return is over forty to fifty years and is therefore liable to considerable economic and social vagaries. Next, the differentials may be due to a multiple correlation. Entry to higher education is associated with social origin, money, intelligence, and diligence so that in a society without higher educational opportunities the earnings of the people in question might have been exactly the same. Lastly, the higher education may in itself command the price that is later paid. In an American study3 the following statistics are cited as an example of the returns on educational investment. In 1949, a man with an elementary education earned on average $3112, a man with a high school education earned $4519, and a college graduate earned $7907. This apparently gives a very high return for the comparatively modest costs of a college education even if opportunity-costs are taken into account. In any case, however accurate the analysis may be, it would still be true that investment in higher education must be subject to diminishing returns and that consequently the result-other things being equal-of continuing investment in education must be to narrow the range of income differentials arising from earnings. There are signs that this is the case in a number of occupations in highly developed societies, where income differentials from earnings are considerably less than in underdeveloped societies. Consequently the statistics quoted above are not necessarily indicative of a permanently high rate of return on investment in education, particularly when the points made earlier are considered.