What is the value of an education?

At a time when students, parents and governments are looking with concern at ever increasing levels of student loan debt, the returns to schooling seem to be declining, on average, at least slightly.

The value one gets from an education, in terms of future earnings, has been decreasing over time. The returns to another year of schooling tend to decline as the level of schooling rises in an economy.

Recent research, “Comparable Estimates of Returns to Schooling around the World,” reports that the latest estimates of private returns – what individual students earn relative to what they would have earned without that investment – to schooling using comparable data from 140 economies around the world and more than 800 household surveys. As it is well-known, the rate of return to schooling equates the value of lifetime earnings of the individual to the net present value of costs of education. For an investment to be economically justified, the rate of return should be positive, and should be higher than the alternative rate of return. For the individual, weighing costs and benefits means investing as long as the rate of return exceeds the private discount rate (the cost of borrowing and an allowance for risk).

Don’t get me wrong. The returns to schooling are still significant. The overall rate of return to schooling is healthy, at 10 percent, globally. Try to get that in a savings account! Moreover, the returns are higher in lower income countries. There is also variation by level of schooling. Schooling is also a great equalizer and is a force for women’s equality. The returns to schooling continue to be higher for women than for men.

The biggest change in the patterns observed is that the returns to primary education are no longer the highest. High returns to primary education were one of the reasons put forward since the 1990s to emphasize primary education in the international development sphere. First place now goes to tertiary or higher education. The returns to primary schooling are above 10 percent. Returns are lower at the secondary level, at just seven percent. The returns to schooling are a whopping 15 percent at the tertiary level. Note: deposit interest rates averaged 4.9 percent andlending interests rates averaged 11.8 percent in 2013 globally. The average returns to schooling in sub-Saharan Africa are 12.4 percent.

Are there policy implications? Yes. I would point to three important ones.

1. Focus on investing on the poor. Ensure that they get a good education – more than just attending school, ensure quality and that they learn. The returns to primary schooling may be falling because the quality is poor. If the quality is poor, then access to the secondary and tertiary levels for the poor will slow down and higher returns at the tertiary level will lead to growing inequality. A focus on the poor, starting with quality basic education, is also an investment in the higher education of the poor in the near future.
2. Invest in education quality. Focus on basic education has emphasized access and not enough attention has gone towards quality. Access to basic education has increased considerably over the last few decades. While 58 million children are still out of school, between 1999 and 2012, the number of children out of school fell almost by half. Therefore, lower returns to primary schooling do not imply that one should abandon basic education as a priority. The returns to secondary schooling are low, probably because quality is poor and the best students continue on to tertiary education. Quality is an issue: there are 250 million children unable to read, write, or do basic mathematics, 130 million of who are in school. Much more needs to be done to improve learning outcomes based on our emerging knowledge base of what works.
3. Expand higher education. High returns to tertiary signal that university is a good private investment. The public priority, however, isn’t a blanket subsidy for all, but a concerted effort to improve fair, equitable, sustainable cost-recovery at the university level (e.g. income-contingent student loans); targeted subsidies for tertiary education when appropriate; and expansion of higher education opportunities through regulatory reforms that permit diversity of supply and level the playing field.

As Jan Tinbergen, a Dutch economist and the first Nobel Prize for Economic Sciences winner, said:  inequality is a “race between education and technology”. The importance of investing first in the poor is one way we can help the disadvantaged gain an edge in that race.

This post first appeared on The World Bank Education for Global Development Blog. Publication does not imply endorsement of views by the World Economic Forum. 

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Author: Harry Anthony Patrinos is a Manager at the World Bank’s education sector.

Image: A teacher writes on a blackboard during class at a public school.  REUTERS/Sergio Perez