Education and Wealth

One of the mantras that I hear fairly frequently goes something like this: "if only we could provide better education for the children, it would lift them out of poverty and provide great economic benefits for the the whole country."

There's not a shred of evidence that this is true. In fact, there are some shreds against. One is the paper Human capital and long run economic growth: Evidence from the stock of human capital in England, 1300-1900 which has the following abstract:

Did human capital contribute to economic growth in England? In this paper the stock of total years of schooling present in the population between 1300 and 1900 is quantified. The stock incorporates extensive source material on literacy rates, the number of primary and secondary schools and enrolment figures. The trends in the data suggest that, whilst human capital facilitated pre-industrial economic development, it had no role to play during the Industrial Revolution itself: there was a strong decline in educational attainment between ca. 1750 and 1830. A time series analysis has been carried out that confirms this conclusion.

Education has "no role to play."

In more modern times, there's this:

But does that [education] really drive economic growth? 

In fact, the push for better education is an experiment that has already been carried out globally. And, as my Harvard colleague Lant Pritchett has pointed out, the long-term payoff has been surprisingly disappointing.

In the 50 years from 1960 to 2010, the global labor force’s average time in school essentially tripled, from 2.8 years to 8.3 years. This means that the average worker in a median country went from less than half a primary education to more than half a high school education. 

How much richer should these countries have expected to become? In 1965, France had a labor force that averaged less than five years of schooling and a per capita income of $14,000 (at 2005 prices). In 2010, countries with a similar level of education had a per capita income of less than $1,000.

In 1960, countries with an education level of 8.3 years of schooling were 5.5 times richer than those with 2.8 year of schooling. By contrast, countries that had increased their education from 2.8 years of schooling in 1960 to 8.3 years of schooling in 2010 were only 167% richer. Moreover, much of this increase cannot possibly be attributed to education, as workers in 2010 had the advantage of technologies that were 50 years more advanced than those in 1960. Clearly, something other than education is needed to generate prosperity.

As is often the case, the experience of individual countries is more revealing than the averages. China started with less education than Tunisia, Mexico, Kenya, or Iran in 1960, and had made less progress than them by 2010. And yet, in terms of economic growth, China blew all of them out of the water. The same can be said of Thailand and Indonesia vis-à-vis the Philippines, Cameroon, Ghana, or Panama. Again, the fast growers must be doing something in addition to providing education.

The experience within countries is also revealing. In Mexico, the average income of men aged 25-30 with a full primary education differs by more than a factor of three between poorer municipalities and richer ones. The difference cannot possibly be related to educational quality, because those who moved from poor municipalities to richer ones also earned more.

As far as education, jobs, and wealth creation is concerned, I think the key paragraph is this:

And there is more bad news for the “education, education, education” crowd: Most of the skills that a labor force possesses were acquired on the job. What a society knows how to do is known mainly in its firms, not in its schools. At most modern firms, fewer than 15% of the positions are open for entry-level workers, meaning that employers demand something that the education system cannot – and is not expected – to provide.

This is exactly what I've found. Several years ago, I started offering good summer interns a full-time permanent position toward the end of summer because I've found that there's almost nothing they're going to learn in the next 2-6 years that will be useful to me as an employer. Maybe some more statistics, maybe more matrix algebra, and maybe a few other things, but all of those things can be learned on the job and I'm happy to teach them. They'll have to learn the vast majority of the knowledge they'll need to be long-term productive employees on the job so it's pointless, from an economic and employment point-of-view, to bother finishing college (and even high-school) and waste all that time and money. The entrepreneur Peter Thiel agrees with me and has called college a "waste of time."

Humans can't help but learn. Schools only slow them down in my experience and very little of that school learning is economically useful.