High Returns to Schooling – Driven by Productivity or Screening?

The Economist summarizes a new World Bank literature review on the returns to education by Harry Patrinos and George Psacharopoulos. Patrinos and Psacharopoulos find that the returns to education are consistently high, an extra year of schooling yields an average annual private return of 8.8% across 139 countries. The paper shows that there are significant differences in returns across regions of the world, between high-income and lower-income countries, and for men vs. women.

The  researchers calculate the “social” (i.e. non-private) returns to education, an essential datapoint for those interested in the question of how much governments should invest in education.

Another key policy question that the authors address is the mechanism through which eduation impacts wages. Here is how Patrinos and Psacharopoulous frame the debate:

The earnings premium associated with the level of education suggests that productivity increases as people acquire additional qualifications. An alternative view is that earnings increase with education due to credential effects. This refers to the idea that higher levels of schooling are associated with higher earnings, not because they directly raise productivity, but because they certify that the worker is likely to be productive.

I was surprised to learn that the academic literature does not provide much support for the credential effects thesis; rather, positive labor market outcomes seem to be driven by increases in productivity.



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