Measuring the Economic Value of Education

A review of research works regarding the economic value of education shows that it developed in four different directions.

They are:
a) Simple correlations approach,
b) Growth accounting or residual analysis approach,
c) Cost-benefit analysis, and
d) Manpower planning

In simple correlations approach indicators of economic growth are correlated with indicators of education. Correlation values are used to draw inferences regarding the economic value of education. At Macro level, national level data were used prominently by Harbison & Myers, Mary Jean Bowman and Charles Anderson, and David McClelland. Scores of micro-level correlation studies have also been conducted in different parts of the world. Very high, positive and significant correlations between education and development were discovered in all these studies. However, the mainstream economists were not satisfied with all these studies. They dismissed these evidences on the ground that “Correlation is not Causation”. Hence, research on the relationship between education and development went in the direction of growth accounting approach, using Regression Analysis techniques. Using United States national income data for the period 1929-1958, Denison and Schultz did independent analysis and demonstrated that nearly 25 per cent of the growth during that period was accounted by education.

This was a startling revelation highly useful for creating a space for public investments in education. Later, Jorgensen continued research in the same direction and for the period 1959-1988 further demonstrated the contribution of non-economic factors to development. Using data on individual earning profiles, several researchers demonstrated the contribution of education to earning differentials among individuals over a life-time. These researchers used the Cost-Benefit approach. George S. Psacharopoulos, formerly Chief, Education Division, World Bank, has been regularly providing updates on the researches in this direction at the global level.

East European nations and the USSR adopted Manpower models for educational planning in their centralized planning models. This was basically to strike ‘fitness’ between supply of educational skills and demand for manpower. In this way, expenditures on education could be made more and more efficient, relevant and meaningful.