An article in the Spring 2008 issue of Education Next prepared by a group of four economists discusses how human capital accounts for differences in economic growth for fifty countries from 1960 to 2000. The article, titled “Education and Economic Growth,” centers on a study that the economists conducted. They find that higher levels of cognitive skill, defined as “the performance of students on tests in math and science,” play a major role in explaining international differences in economic growth.
In the past, economists have only looked at the effect that “school attainment,” defined as the average number of years that students remain in school, has on a nation’s economic future. But that kind of analysis, they argue, has two major drawbacks: first, a year of schooling in Papua New Guinea does not equal a year of schooling in Japan. Second, these analyses do not account for learning done outside the classroom such as within families or over the Internet.
In this study, the authors-Eric A. Hanushek, senior fellow at the Hoover Institution of Stanford University; Dean T. Jamison, professor of health economics in the School of Medicine at the University of California, San Francisco; Eliot A. Jamison, an investment professional at Babcock and Brown; and Ludger Woessmann, professor of economics at the University of Munich-focused only on students’ performance in math and science, which they saw as a more direct measure of a country’s human capital. To conduct the analysis, they used Programme for International Student Assessment (PISA) and other international math and science assessments, dating back to 1964. Then, using the National Assessment of Educational Progress (NAEP) and the United States’ performance on each international test, the economists aggregated all available scores for each country into measures of cognitive skill levels for each country.
The analysis identified top performers (Finland and Japan), average performers (United States and Germany) and low performers (Albania, the Philippines, and South Africa) in math and science. In addition, because they had data from four decades, the authors were able to track an individual country’s performance. Through examining the data, they were able to determine that while students in the United States, Germany, and Hungary have slipped, students in the Netherlands and Finland have improved.
With this new information, the authors compared the economic benefit of higher levels of school attainment with the benefits of higher levels of cognitive skills. They found that each additional year of schooling in a country increased the average forty-year growth rate in gross domestic product (GDP) by 0.37 percentage points. When they performed the analysis again and included the average test-score performance of a country, they found that countries with higher test scores experienced far higher growth rates in GDP.
“If one country’s test-score performance was 0.5 standard deviations higher than another country during the 1960s-a little less than the current difference in the scores between such top-performing countries as Finland and Hong Kong and the United States,” the report reads, “the first country’s growth rate was, on average, one full percentage point higher annually over the following forty-year period than the second country’s growth rate.”
While a 0.37 percentage points increase and 1 full percentage point increase might not sound like much, the authors point out that since World War II, the world economic growth rate has been around 2 to 3 percent of GDP annually. “Lifting it by 0.37 percentage points is a boost to annual growth rates of more than 10 percent of what would otherwise have occurred,” they write.
The article notes that two additional factors affect a country’s economic growth rate: the security of its property rights and its openness to international trade. Once those factors were taken into account, the positive effect of cognitive skills decreases from one full percentage point to 0.63 percentage points, but the impact is still significant.
The authors also examine what would happen to GDP in the United States if the nation could boost its performance on the PISA math and science exams by fifty points so that it would rank among the world leaders. Were the United States to close this gap, the study’s authors project that the United States GDP would be 4.5 percent greater by 2015.
“That 4.5 percent increment in GDP is equal to the total the U.S. currently spends on K-12 education,” the report reads. “In other words, had that money effectively raised cognitive skills by the fifty test points that would have brought the United States close to world leadership, the economic returns to our country would probably have been enough to cover the entire cost of education in 2015 and after.”
But if America has traditionally performed so far below its international counterparts, how is it a world leader now? Anticipating this question, the article explains that the United States may be “resting on its historic record as the world’s leader in educational attainment,” which includes opening secondary schools for all citizens and expanding higher education through land-grant colleges and the G.I. Bill. Additionally, the authors believe that the United States’ freer labor and product markets, limited government regulation, and lower levels of government involvement in the operation of the economy tends to “encourage investment, permit the rapid development of new products and activities by firms, and allow U.S. workers to adjust to new opportunities.”
However, the article ends with a note of caution. “Although the strengths of the U.S. economy and its higher-education system offer some hope for the future, the situation at the K-12 level should spark concerns about the long-term outlook for the U.S. economy, which could eventually have an impact on the higher-education system as well…” it reads. “Identifying what works and how to implement it on a society-wide scale remains a challenge, not only for the U.S. but also for many nations across the globe. But, if we are to remain economically competitive, we need to solve the puzzle of our schools…”
“Education and Economic Growth” is available at http://www.hoover.org/publications/ednext/16110377.html.