The Rising Returns to Education and the Supply Response

We’re taking a life cycle approach to human development and the accumulation of human capital. Human capital measuring the investments in health nutrition and education, which enables us to be productive citizens and productive members of the economy.

We’ve seen that it’s crucial to make investments in all stages of the life cycle, especially not missing the early years. We’ve seen, as well, that primary education has gotten a big boost. Especially during the millennium development goal period. While there are still tens of millions of children, especially in conflict areas, not in school, though of primary school age. Enrollment rates have increased markedly and enabled a closing effectively of the gender gap as well so that young girls, like young boys, are in primary school. But we know that the investments in education have to continue, that there remains a significant gap into secondary education, which should, like primary education, be targeted for universality. Of coverage access and results during the next phase of the global development goals as part of presumably the sustainable development goals of 2015 to 2030.

There’s plenty of evidence that the benefits to society of helping the young people not only complete secondary school, but go on to higher education, are very, very high. We’ve already looked at this graph that you are now looking at again. The wage premium for college graduates compared to high school diploma holders. We can see, remembering the forces of globalization and technological change, how since 1979 onward that wage premium for getting a university degree has soared. And this is a market signal not only in the United States, but around the world that to the extent feasible children should aspire to complete primary, secondary education, and then go on for some kind of higher level education. Whether vocational training, specialized skills, craftsman, skills, artisanal skills or to go on to a higher degree in a tertiary university. Now when the market sends the signal that something, some activity or some kind of project has a high rate of return, you would naturally expect a, an increased supply of that activity in other words, more investments in that high return activity. You would expect, therefore, for example, in the United States where the returns to higher education have soared, that more kids would be completing a bachelors degree.

To some extent, that’s happening, but something odd is also happening, and for the United States a very notable phenomenon. Have a look at these, this graph showing the percentage of 25 to 29 year olds. That is completing a college degree. For high school level, the top curve, you see nearly 100% high school completion. Unfortunately, not at 100%, because there are still too many kids not even getting a high school diploma. Which, in the context of the U.S. society, and U.S. labor market, is almost a, a guarantee of poverty and trouble. Look at the lower curve, which is the curve showing the proportion of kids getting a four year bachelor’s degree. Now what this is measuring is a specific age cohort, 25 to 29 year olds. And asking of, in any year of the 25 to 29 year olds, what fraction of that age group has a four year bachelor’s degree. What you can see is that from 1940 to around 1975 that proportion increased a lot, from around 5% of that age cohort to around 20% of the age cohort. The line went up gradually but persistently so that more and more young people were going to a four year university getting a degree, and we know enjoying the higher earnings that came along with that. But then that upper sloping curve has a kink starting around 1975. It’s still rises but very, very slightly. There’s almost a stability in the share of the 25 to 29 year olds with that four year degree. Something doesn’t make sense. Just when the returns are going up, the proportions of young people actually completing the four year degree stop rising, or at least stop rising at the pace that they had been rising. And so, while at a bit over 20% in 1975 have a four year degree, by the time you reach 2009, 2010, maybe it’s 30%, but it’s not much above that. And so the proportions have really stopped increasing at anything like what we would expect from the signal that the benefits of going to university are so high. What’s going on?

Well, there’s clearly some kind of bottleneck on the supply side. And the next graph gives us some suggestion of the nature of that bottleneck. Tuition costs are large and also rising and so, just when society ought to be helping young people to make that investment in higher education. Tuition costs and bottlenecks in the university system are holding back the supply response. We see here the sharp increase of net tuition costs in this case for public institutions of higher learning and in general by almost any category again in the US context especially there have been soaring tuition costs. What’s the implication of this? The implications are two and they really are quite troubling. One implication is that a very large part of our, our young people even in a very rich country like the United States, are not able to enjoy the benefits for themselves and for society of a complete higher education. Still, two thirds or higher proportion of young people don’t make it through a four-year degree, even though the markets are screaming out, if you want to be part of the middle-class, you want a stable job, go to university.

But, the tuition costs are so difficult. That, that proportion has leveled off. The second very troubling aspect of this is that those who make it, of course, are those who are coming from wealthy families. And so there is an exacerbation of income inequality in the United States, and a reduction of social mobility as a result of this bottleneck. If one looks at the proportions of kids according to ethnicity that achieve a four year university degree in the United States of white non-Hispanic kids, it’s something around 35%, with the tendency we’ve seen for that number to rise. For African-American kids young people age 25 to 29, only about 16% have a completed four year degree. For Hispanic young people age 25 to 29 it’s only around 11%.

This means that this bottleneck in society is not only holding back the benefits that technology and globalization have given to more training, more specialized knowledge in an information society, but are creating a kind of filter making it even harder for poor, young kids to make it. And thereby reducing social mobility as well as increasing inequality in society because those who do make it coming from more prosperous families are getting the added boost of earnings and job security. And it’s the poor kids from the poor families who aren’t making it. There’s another irony to all of this. And that is that the mechanism that the United States at least has used, to this point, to address this crisis, has really proven to be inadequate. The US by virtue of its libertarian traditions always looking for the market solution, even when the market solution isn’t necessarily very wise. Essentially said to the generation of young people, go to university, and take debt, borrow, in order to do it. And the government helped to create a rapidly rising level of student loans. The double irony of this is, of course, it’s the poor kids who take the loans because the kids from wealthier families are able to afford the tuition straight out usually from the household, the parents providing the tuition. And the added burden, which has created a real mess for millions of young people, is that poor kids are taking student loans and then also not completing the four year degree. Maybe taking enough loans for one year or two years, but not able to make it all the way through university. Then the calamity is obviously multiplied because the benefits of those added years of schooling from the point of view of earnings are quite small, but the burden of the debt is enormous. And this graph that you’re looking at shows how rapidly the debt has been growing in recent years, from an estimated $250 billion total of student debt in 2003, to 10 years later a fourfold increase to the point where there is $1 trillion of student debt outstanding.

Much of this debt owed by young people who did not complete a four year degree and will not complete it and will not have the means; therefore, out of that expanded income to repay what they borrowed. It’s a calamity. It’s a rather serious miscategorization of public policy, looking for a market solution where a market solution is not all that adequate and there’s going to have to be innovation in approach. One important aspect of innovation, I think can be obvious even in the way that we right now are interacting. You’re watching me online, and what that means is something I think with potentially great significance more generally. Online information technologies which continue to fall in price, and with new innovations of best ways to combine online and in the class, and in person education. Give the chance to end that bottleneck through dramatic reductions of the cost of tuition. Making it possible to reach many, many more young people, I hope all over the world. We can envision within reach, I think big breakthroughs in all of our acts as to new information, new ways to learn and new kinds of university settings. That gives us the hope that, just as society and the markets are sending signals. Gain skills, get an education, go for more advanced training. Those same technologies that are giving the added returns to education, are going to give us the ways to also give the added supply to make it possible for education to reach everybody using the wonders of information technology. Hope it’s working for you because I hope that it can work generally for young people around the world