More cheese for your chalk

PUBLISHED : Monday, 02 July, 2012, 12:00am
UPDATED : Monday, 02 July, 2012, 12:00am


United States President Barack Obama recently said the highest return available on any investment was the one made by parents in their children's educations. Everyone sort of knows this, but can this assertion be quantified?

In parents' minds, it probably can - especially during the summer months, when they have to make decisions about their children's education and how to pay for it. In education-obsessed Hong Kong, it is hardly necessary to tell parents that an investment in schooling brings rewards in both a monetary and a social sense. However, the data on this matter is not straightforward; benefits are not as predictable as people might think.

With these caveats in mind, let's start with the good news. A 2005 Rand Corporation study used a cost-benefit analysis to conclude that every US dollar invested in education produced returns of US$2.50 to US$16. Most other studies have findings that cluster around the midway point of this range, suggesting that every dollar invested yields a return of US$8-10.

The bigger macroeconomic picture, contained in a 2006 Brookings Institution study, found that over a 40-year period US output had grown annually by an average of 3.5 per cent, and the productivity of labour increased by an annual average of 2.4 per cent. Improved education accounted for between 13 and 30 per cent of that gain.

Most academic studies looking at the cost of education and its impact on economic development focus on poor nations, or poor people within rich nations. There are reasons for this, but basically researchers have been impressed by how education transforms the lives of the poor. There is considerable evidence that shows this is the way of alleviating poverty that costs the least.

The returns of educational expenditure are much higher among the poor than among the rich, despite the rather obvious fact that those with more money spend more on education.

A much quoted piece of research by Professor George Psacharopoulos and Dr Harry Patrinos, released in 2004, showed that higher levels of national economic development turned out to produce lower levels of reward for educational spending. Yet the rate of return on each year of education beyond basic schooling was 10 per cent.

In 2009, Psacharopoulos published a study focused on European examples and found something interesting: the overall benefits to society from spending on higher education were marginally higher in the less developed economies, such as the Czech Republic's, than in places such as Britain. However, when it came to individual returns on investment in education, there was a far greater impact. In the Czech Republic, for example, the returns on private investment averaged 26.5 per cent, compared with Germany's 6.4 per cent. This translated into far higher earnings for students who completed tertiary education compared with those who stopped after secondary school. In Hungary, their earnings were more than double those of people who lacked higher education; in Britain, the differential was 'only' 50 per cent higher.

In Hong Kong, which has started to pump out university graduates at a much faster pace and where there has been an influx of highly qualified mainland graduates, the relative earnings advantage of a university degree has also been depressed by supply and demand.

There is overwhelming evidence that the really effective determinant of high returns on human capital comes from pre-school and basic school education. James Hackman's 2006 research showed that nearly all the significant returns on education investment occurred lower on the educational ladder than is thought.

What this means for parents making decisions about their children's educations is that, although a decent university education is still the key to higher earnings, investment at the earlier stages produces bigger returns in the long run.

And as economies develop, the demand for a highly educated workforce increases, but so does the supply. Meanwhile, all is not lost for those at the other end of the spectrum whose services will remain in demand, possibly with better levels of pay as supply diminishes.