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What Is the Relationship Between Education and Economic Growth?

Measuring the impact of education on economic growth has been difficult to do in a consistent way.
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  • Written By: Ray Hawk
  • Edited By: E. E. Hubbard
  • Last Modified Date: 07 December 2014
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Education and economic growth are intertwined within economies in large part because the higher or more widespread the level of formal education is, the more it seems to alter the efficiency and innovative capacity of a population. Workforce capabilities are referred to as labor capital in this respect, and both primary and higher education can enhance the value of this capital. While, in many poorer countries, general education of the population in the past has been seen as expensive and unnecessary, research as of the late 1980s and early 1990s has shown this to be a misconception. Education of the general population has a fundamental impact on economic development through three primary means: increased productivity, the encouraging of innovation, and the rapid adoption of new technologies.

Measuring the impact of education on economic growth has been difficult to do in a consistent way, however, and evidence for promoting a connection between the two is often fragile. This is due to the fact that cultural variables can skew the value of formal education, such as how well-managed a public education system is, what the state of health and nutrition for children is, and how much the society contributes to passing on skills informally to the young, known as tertiary education.

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In developing nations such as Ghana, Uganda, and South Africa, certain common trends have been observed that are considered universal. Education increases the standard of living overall, but the most significant impact on economies is only clear where large changes occur both at the higher and primary education levels. Investment in basic education also has been shown to have a lower positive effect on the lives of most people dollar for dollar versus equal investment in infrastructure and other key aspects of an economy.

The business cycle in some nations benefits more strongly by implementing policies that increase the level of trade versus focusing first on education and economic growth. This may be due to a bias in the research, as education statistics at a micro-societal or family and entrepreneurial scale tend to show much more positive contributions to an economy than they do at a macroeconomic scale. The statistics also focus on quantity over quality in gauging the level of education by counting the average number of formal school years completed by resident populations instead of looking at the quality of the schooling itself.

Much of the research into education and economic growth since the 1990s has focused on popular endogenous-growth theories. These theories reveal that improving education in developing nations increases the rate at which populations are able to adopt better technologies and industrial processes for the efficient production of goods and services. Education and economic growth, therefore, clearly raise the standard of living of poorer nations towards one that parallels technologically-advanced societies. The same model cannot be used, however, to promote the idea of education and economic growth in nations that have already adopted such technologies and have relatively high standards of living. This premise is used to explain why countries like South Korea have had much faster growth rates than ones like the United States in past decades.

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candyquilt
Post 3

@bluedolphin-- So I guess that's why developing nations prefer to invest in things other than education to improve their economy. Things like innovation require a lot of money and time. But something like digging for and using natural resources is far more effective, at least in the short-term.

bluedolphin
Post 2

@fBoyle-- I don't see things that way at all. There is definitely a connection between education and economic growth. I think the issue with studying the relationship is that the effect takes time. Education encourages economic growth in the long-term and the effect isn't as noticeable as some other factors like investment, so it's difficult to measure.

Think of it this way, there are several major factors that lead to economic growth. These are: resources and innovation. Considering that a developed nation like the US has already discovered its resources and using them fairly efficiently, the biggest factor that can boost economic growth is innovation. I'm talking about technology -- new and better ways to do things. And guess what? A nation that is not educated cannot innovate. So education is immensely important.

And just to let you know, defense, security and stability are just as important for the economy.

fBoyle
Post 1

I guess the US government doesn't believe that there is a strong link between education and economic growth because as of 2014, only 3% of the federal budget is allocated to it. Compare that to 20% of the budget for defense spending.

I guess I also see the downsides of everyone having high levels of education. There will be less people to do mundane jobs like factory or restaurant work. And considering that production is very important for the economy, too many white collar Americans may not be a good idea.

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