Three broad facts about education have recently emerged. Firstly, almost universally education is found to lift people out of poverty. Secondly, when a comparison is made between investing in education and other forms of investment, the returns from investing in education are on average lower. Thirdly, the returns to education – in the sense of the increment in income that accrues to each year of education – are much higher for those with higher levels of education.
The amount of education acquired by workers has an important impact on labour market experience. The most direct way that education affects the labour market experience of workers is by increasing their productivity, thus increasing their earnings. The more education individuals acquire, the better they are able to absorb new information, acquire new skills, and familiarize themselves with new technologies. By increasing their human capital, workers enhance the productivity of their labour and of the other capital they use at work.
The education received by an individual not only affects his earnings, but the quality of his employment as well. In his book ‘Studies in Human Capital’, Jacob Mincer stated that educated workers have three advantages relative to less-educated workers: higher wages, greater employment stability, and greater upward mobility in income. Increased earnings by workers with higher education levels are a result of two factors. First, increased human capital results in higher productivity that allows workers to extract higher hourly wages. Second, increased education increases labour force participation, decreases the probability of unemployment, and decreases job turnover. The result is that highly educated workers labour a greater number of hours annually for higher hourly wages than their less educated labour market competitors.
Firms reap benefits from education via the higher productivity of their employees. Better-educated employees are not only more productive, but also raise the productivity of their less-educated colleagues.
Societies benefit from education through the direct effect of higher productivity on growth. A number of additional benefits including better public health and greater social cohesion have also been found.
A commonly used measure to determine whether investment in education, or in any other project, is worthwhile is the internal rate of return. This measure compares the current and future value of costs and benefits arising from education. Both private and social rates of return can be calculated to judge the returns of further investment in education for individuals and governments.
Investment in human capital enables individuals to increase their future earnings and enhance their experience in the labour market. The knowledge that education benefits the individual student in terms of increased earnings is widespread, but information is incomplete about the benefits that increased education has on society. In the information economy of the 21st century, education will become increasingly important. Investment in education contributes to enhanced labour force productivity and enables individuals to become better citizens and parents in addition to being better workers.
