Shakopee Senior High School
Meet John Smith, the young, average American teenager. After more than 12 years of schooling, he is on track to graduate this year. But, he is also faced with a dilemma. Should he pursue higher education? Do the benefits outweigh the costs? In this, it is America’s responsibility to encourage and provide a way for intelligent individuals to pursue higher education because it is valuable to the betterment of society. At its core, higher education makes society more productive. Even after accounting for opportunity costs, it is clear that higher education increases the marginal products of workers and provides positive externalities to the larger society, even to those not pursuing higher education.
The human capital theory postulates that people, as a form of capital, are worth investing in. Likewise, education can be considered a human capital investment, and therefore an input of production. In other words, John Smith and the post-secondary education he will receive are an input—and a wise investment. According to an earnings analysis conducted by Patricia Jones from the Department of Economics at Vassar College (1999), “a one-year rise in the average level of education in a [high-technology] firm is associated with a 12.6 percent rise in productivity” (p. 25). Several other researchers, including Hill, Hoffman, and Rex (2005, pg. 1), as well as van Rens (2008, para. 6), support Jones’ findings and argue that an 8 to 12 percent productivity rise is, in fact, an accurate generalization of productivity gains for most developed countries. As an individual worker invests in his education, that worker becomes sufficiently more productive and his marginal product is therefore greater relative to that of his unschooled counterpart, increasingly benefiting the firm the schooled worker is employed in (Foster, n.d., p. 3). Thus, as the quality of a firm’s input increases through its workforce of many better-educated John and Jane Smiths— though not all specializing in the same area—the firm’s output also significantly increases, allowing the firm to produce more of one good without an increase in workers, benefiting rather from the general increase in the level of their workers’ education.
Despite the gain in productivity from an increase in workers’ education, some may point to the opportunity costs of achieving higher education. After all, the time that John Smith invests into post-secondary education could be spent on other pursuits, including a job. Thus, researchers Hill, Hoffman, and Rex (2005) argue that in order for the economic value of a college education to be properly assessed, the benefits of higher future earnings must be discounted for the time value of money, which must then be weighed against the other costs of education, such as tuition paid and earnings forgone by the student while he or she is in college. Despite this, their conclusion confirms that higher education is not only valuable to the firm, but it is also a wise investment for the individual himself. The researchers found that even after the cost-benefit analysis is complete, “the benefits of a college education are seen to be more than three times as large as the costs.” In fact, individuals with a bachelor’s degree earn 75 percent more in wages annually than those with only a high school degree, which eventually adds up to a significant $1 million or more in additional earnings over the course of a lifetime (Hill et al., 2005, p. 11). The human capital theory comes into play once again, suggesting that as individuals receive more schooling, they make themselves more productive and therefore more valuable to firms looking to hire workers, thus increasing the wages they earn over a lifetime (Son, n.d., p. 9).
Education’s benefits do not stop at the level of the firm or the individual, however; the positive externalities that result from individuals’ pursuit of higher education benefit the country as a whole also. Van Rens points out that if the average education level was increased in the country by just one year, the long term gain from such an increase would be a 42 percent rise in the country’s output (2011, para. 6). The reason for the large increase, van Rens argues, is the result of technological process—a better-educated labor force is generally more able to create or adapt to new technologies, leading to higher growth (para. 7). Hill et al. also support this proposal, arguing that human capital complements physical capital, allowing more educated workers to use more sophisticated equipment and lead to further productivity (2005, p. 25). Yet, the better educated Johns and Janes in America do not yield just an economic benefit. Other non-monetary effects also speak to the importance of higher education, such as the fact that higher educated people experience lower crime and incarceration rates and greater social cohesion, as reflected in greater voter turnout among the more educated population (p. 26).
If educating John Smith is beneficial to the larger society, the question arises as to whether or not government should provide support for post-secondary education. Aforementioned externalities, as well as the increase in marginal products of educated workers, provide good reason for government intervention. According to Professor Thijs van Rens, because individuals may not receive all benefits of their enrollment in an institution of higher learning directly, considering the externalities that spill over to the general population as well as the business firms from a student’s decision to attend college, individuals may not be as motivated to pursue as much education as would actually be optimal from the larger perspective of the entire country. Van Rens (2008) argues:
“Thus, by subsidizing education, the government fosters higher growth and welfare. Our estimates also show that it may take several decades for these additional benefits to realize. Thus, investing more in education is a sensible policy for a government that cares about the well-being of future generations” (para. 8).
By ensuring subsidies for higher education, the government invests in the long-term success of its own Johns and Janes—its human capital—with promising returns.
It is in America’s best interest to encourage the bright individuals of today’s generation to pursue higher education; John Smith’s postsecondary education is a worthy investment. Clearly, its value extends from individual and company benefit and spills out through various externalities to benefit the country both socially and fiscally. Ultimately, governments and people must look at higher education as an investment in human capital that equips individuals with knowledge and expertise that enhance employability and productive capacities, leading to the betterment of society as a whole.
Foster, N. Wage functions [PDF Document]. Retrieved from http://homepage.univie.ac.at/neil.foster/TEACHING/ECONO/Wage%20Functions.pdf
Hill, K., Hoffman, D., & Rex, T. R. (2005, October). The value of higher education: individual and societal benefits. Retrieved from http://wpcarey.asu.edu/seid/upload/Value%20Full%20Report_final_october%202005a.pdf
Jones, P. (1999, September). Are educated really workers more productive? Retrieved from http://www.cid.harvard.edu/archive/events/cidneudc/papers/jones.pdf
Son, H.H. Human capital and economic growth. Retrieved from http://www.adb.org/Documents/Produced-Under-TA/41040/41040-Human-Capital.pdf