What drives social returns to education?

By Ying Cui and Pedro Martins

Schooling typically delivers significant private returns, with better educated individuals generally receiving higher earnings. However, the schooling of one person has also the potential to generate significant positive effects on other individuals, through formal and informal social interactions between them. Economists refer to these spillovers as ‘externalities’. These third-party effects also explain the wedge between private and social returns to education: while the former are typically estimated at 5% to 10%, the latter can be as high as 10% to 20%.

Such third-party effects mean that the education provided exclusively by markets would be inefficiently low. Government intervention can correct this ‘market failure’ – which explains the large public investments in education, particularly at the primary and secondary levels, that we observe in most countries. For instance, according to the World Bank, over 15% of governments’ total expenditure is devoted to education. This amount to an average of more than 4% of GDP around the world.

This non-technical blog summarises the findings of our recent GLO working paper, in which we seek to understand the factors behind different social returns to education, including the role of economic development. To do so, we conduct what we believe I the first meta-analysis of the social returns to education literature. We analyse over 1,000 econometric estimates from 31 articles published between 1993 and 2020. These articles cover 15 countries in total, a third of which are emerging or developing economies.

Some of our main findings are as follows:

First, education spillovers are stronger when measured at the workplace (compared to the region, the industry or the country). This may be because people engage much more directly and intensively within firms, including through face-to-face communication. This facilitates deeper interactions, through which the human capital obtained by each worker from their schooling can more easily spillover to other individuals, their colleagues, thus magnifying the social effect of schooling.

Second, tertiary schooling and schooling dispersion increase spillovers. It is widely believed that spillovers are largely generated by highly-educated individuals, thus increase in tertiary education appears to be a particularly relevant source of such externalities. Moreover, spillovers tend to decrease as schooling dispersion in the labour market shrinks. In the limit, if every worker has the same level of schooling, a higher level of schooling for the entire workforce may not lead to spillovers as there would be no scope to learn from more-educated colleagues.

Third, spillovers slow down with economic development. This finding may be driven by the positive association between income and schooling levels at the cross-country level and the diminishing scope for spillovers as schooling levels increase. If a large share of the workforce already has higher levels of schooling, the scope for less-educated workers to learn from their more-educated co-workers is weaker, leading to lower spillovers.

In conclusion, our findings support the continuing (public and private) investment in schooling – including tertiary education – as they highlight the strong social role of education. Education may promote world development both from an individual private perspective but also in terms of the higher social returns that it generates, in particular in emerging economies.

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