Education productivity and income

There are very strong links between education, productivity and economic growth. Workers with more skills are more productive, and greater productivity leads to greater income.

A study by Federal Reserve economists examined the factors contributing to greater state prosperity over a 65-year period and found that a state’s high school and college graduation rates, along with the rate of patents, were the primary factors explaining which states experienced more rapid growth in per capita income.

But the economic gains to society from education go beyond the obvious link between skills and productivity. Higher levels of education also correspond with healthier people, lower rates of mortality, and lower rates of crime. Greater parent education correlates positively with children’s health, cognitive abilities, and academic achievement. The children of more highly paid workers are also less likely to grow up in poverty, less likely to be poor as adults, and more likely to be better educated and well paid as adults, and therefore less likely to rely on public assistance. All of these factors contribute to a more productive society with not just more productive workers, but also fewer public and private resources spent helping people who struggle because they haven’t been able to achieve their full potential and fewer resources devoted to caring for an unhealthy population.

Those with a four-year degree earn substantially more than those without such a degree so it is not surprising that metro areas with a higher percentage of college grads have higher average earnings. But that’s not the only benefit to the community. A higher graduation percentage also boosts the wages of those without degrees as well, and this spillover effect is substantial. And metro areas with higher percentages of college grads are more productive, and the productivity gains are spread beyond the college-educated workers themselves.

Investing in school facilities or in K-12 education generally has economic payoffs. School districts across the country have underinvested in facilities for years, and many public school buildings have deteriorated to the point that student attendance and performance is adversely affected. Investments in school facilities have been shown to lead to improvements in student test scores.

The long-term benefits of quality early childhood education programs have been well documented. Universal pre-school for four-year-olds improves a child’s cognitive, social, and character development, with long-term effects not just on school test scores but on lifetime earnings. The positive effects persist well into adulthood despite the “test score fading” that occurs with most early childhood interventions; moreover, the benefits from public pre-school are likely to outweigh the costs of the program several times over. And investments in pre-school could help to ensure that the growth in productivity would be broadly shared and would reduce income inequality.

Increasing education levels is an important way to boost productivity, and to make possible the growth in income that can lead to a higher standard of living for everyone. For example, higher education levels are associated with technological advances and with a greater degree of entrepreneurial development, both important sources of growth in productivity and jobs.

Education and Income

The relationship between education and income is strong. Education is often referred to as an investment in human capital. People invest in human capital for similar reasons people invest in financial assets, including to make money. In general, those with more education earn higher incomes (see the table). The higher income that results from a college degree is sometimes referred to as the "college wage premium." Research shows that this premium has grown over time.7 In addition, in general, the more skills people have, the more employable they are. As a result, workers with more education have a lower average unemployment rate than those with less education.

Education and Wealth

The relationship between education and wealth is also strong. Of course, earning a higher income makes saving easier, and saving is necessary to build wealth. Those with lower incomes have a flatter (non-humped) income pattern, which makes saving and paying down debt more difficult. But those with more education also tend to make financial decisions that contribute to building wealth.8 It is important to realize, however, that anyone can follow the financial behaviors that well-educated families tend to practice, such as these:

1. Have some liquid assets. Liquid assets can help relieve financial distress during a difficult time without having to sell assets or accumulate debt. Liquid assets include savings accounts, stocks, and bonds.
2. Diversify. To diversify means to invest in various financial instruments to reduce risk. In addition to tangible assets such as houses and cars, those with higher levels of education also tend to hold a greater share of their savings in stocks, bonds, and businesses, which tend to provide higher returns (but also more risk of loss).
3. Keep debt low relative to assets. Those with low debt relative to assets pay lower interest rates. Those with high debt relative to assets pay higher interest rates, which can make it difficult to save. And, over longer periods, both savings and debt are susceptible to the effects of compound interest—which means that savings (or debt) can grow at exponential rates over time.9

It is important to realize, however, that the relationship among education, income, and wealth is more complicated than simply more education yielding a higher income and more wealth. Factors such as natural ability and family background also impact both income and wealth and are not caused by having more education.