Who benefits from higher skills?

Catherine Rampell of the New York Times has a good article this morning on state budget cuts to higher education. The article raises broader issues about how policymakers and the public should think about the benefits of investments in education and job skills, from early childhood on up.

The article points out that many states have significantly cut access to higher education programs, through both higher tuition and limiting the number of slots. These cutbacks include cutbacks to programs in which there is a high demand for workers. The article gives the example of cutbacks to nursing programs in North Carolina, despite the state’s shortage of nurses.

These cutbacks are occurring in part because of state budget problems due to the Great Recession and the phase-out of fiscal stimulus.  But if we look back over the last 15 years or so, many states also cut back budget support for higher education even prior to the recession.

This longstanding problem of state budget cutbacks is in part due to ideology. The notion has increasingly spread that education only benefits those educated, and that therefore students and/or their parents should foot the entire bill for higher education.

Professor Ron Ehrenberg, a well-known labor economist at Cornell, is quoted in the article as saying the following:

“There has been a shift from the belief that we as a nation benefit from higher education, to a belief that it’s the people receiving the education who primarily benefit and so they should foot the bill.”

Is this true? No, and the article paraphrases Ehrenberg as making the following argument:

 Economists have found that higher education benefits communities even more than it benefits the individual receiving the degree.

This is a key argument for why there should be public support for more investment in skills. For example, a chart I have been using in some of my talks (for example, see slide 7 from this PowerPoint) presents evidence based on the work of Professor Enrico Moretti of UC-Berkeley.

Consider a policy that raises the percentage of college graduates in a community by 1%. This policy raises the earnings of that 1% by 60%. The resulting DIRECT effect on the overall earnings of the community would be 0.6% (1% times 60%). But studies show that the earnings of the other 99% of the community will actually go up by 1.1%.

As this example indicates, the spillover benefits on the wages of other people of some people getting more skills are about twice the direct benefits for wages of those getting the skills.

What is going on here?  My wages depend on my neighbor’s skills for several reasons. First, if my neighbors at my firm are generally more skilled, my employer may find it easier to introduce new technologies or new production techniques, which will help boost my wages. Second, if my neighbors at nearby competing firms are more skilled, my employer may be better able to steal new ideas from these other employers, which will help my firm’s productivity and hence my wages.   Third, if my neighbors at nearby suppliers are more skilled, my employer will be better able to get better quality supplies at lower costs, which increases my employer’s competitiveness and my wages.

If the community benefits of education are three times the direct benefits, then obviously there is a strong rationale for the community to subsidize community members to get more education. This argument applies not only to higher education, but to early childhood education.

About timbartik

Tim Bartik is a senior economist at the Upjohn Institute for Employment Research, a non-profit and non-partisan research organization in Kalamazoo, Michigan. His research specializes in state and local economic development policies and local labor markets.
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