13.5: Education returns and quality

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How can we be sure that further education really does generate the returns, in the form of higher future incomes, to justify the investment? For many years econometricians proposed that an extra year of schooling might offer a return in the region of 10% – quite a favourable return in comparison with what is frequently earned on physical capital. Doubters then asked if the econometric estimation might be subject to bias – what if the additional earnings of those with more education are simply attributable to the fact that it is the innately more capable individuals who both earn more and who have more schooling? And since we cannot observe who has more innate ability, how can we be sure that it is the education itself, rather than just differences in ability, that generate the extra income?

This is a classical problem in inference: Does correlation imply causation? The short answer to this question is that education economists are convinced that the time invested in additional schooling does indeed produce additional rewards, even if it is equally true that individuals who are innately smarter do choose to invest in that way. Furthermore, it appears that the returns to graduate education are higher than the returns to undergraduate education.

What can be said of the quality of different educational systems? Are educational institutions in different countries equally good at producing knowledgeable students? Or, viewed another way: Has a grade nine student in Canada the same skill set as a grade nine student in France or Hong Kong? An answer to this question is presented in Table 13.1, which contains results from the Program for International Student Assessment (PISA) – an international survey of 15-year old student abilities in mathematics, science and literacy. This particular table presents the results for a sample of the countries that were surveyed. The results indicate that Canadian students perform well in all three dimensions of the test.

Table 13.1 Mean scores in PISA tests

Country	Math	Science	Reading
Australia	494	510	503
Austria	497	495	485
Belgium	507	502	499
Canada	516	528	527
Denmark	511	502	500
Finland	511	531	526
France	493	495	499
Germany	506	509	509
Greece	454	455	467
Hong Kong	548	523	527
Ireland	504	503	521
Italy	490	481	485
Japan	532	538	516
Korea	524	516	517
Mexico	408	416	423
New Zealand	495	513	509
Norway	502	498	513
Spain	486	493	496
Sweden	494	493	500
Switzerland	521	506	492
Turkey	420	425	428
United States	470	496	497
United Kingdom	492	509	498

Source: https://www.oecd.org/pisa/pisa-2015-results-in-focus.pdf

An interesting paradox arises at this point: If productivity growth in Canada has lagged behind some other economies in recent decades, as many economists believe, how can this be explained if Canada produces many well-educated high-skill workers? The answer may be that there is a considerable time lag before high participation rates in third-level education and high quality make themselves felt on the national stage in the form of elevated productivity. The evidence suggests a good productivity future, in so far as it depends upon human capital. At the same time, if investment in human capital is not matched by investment in physical capital then the human capital may not be able to perform to its ability.