Education as Economic Policy

ELIOT Cutler rolled out his plan to increase funding and overhaul the state’s education system as a means to promote economic growth.  As reported by the PPH:

“States that are doing well economically are almost always the states that consistently have made investments in education, from early childhood through elementary and high school, to post high school and beyond throughout (their) citizens’ working lives,” Cutler said in prepared remarks. “We know that a skilled and educated workforce increasingly will be the driver of where businesses are started, where they will relocate or expand, and where they will grow.

At first blush, his proposal echos many of the same comments and statements made by others in the state suggesting that boosting Maine’s economy can come from increasing the education of our labor force.  To be fair, this is just a piece of Cutler’s overall policy proposals, and the education proposal does address some problems (brain drain) and offer some sound solutions to addressing those problems (expand the Opportunity Maine credit, decrease tuition costs, etc.), but his comments quoted by the PPH suggests he is espousing ‘education as economic policy.’ Investments in education need to be made, as do reforms to address the changes that come from a dynamic economy, and so forth.  That is a given. However, the problem in Maine is not so much the advocating of making those investments and reforms, it’s the notion that making those investments and reforms will boost the economy.  As noted previously, the ‘supply (of college grads) creating demand (for those grads)’ is a dubious policy to adopt.  Moreover, there is little evidence that demand for college graduates is increasing in Maine, as evidenced by stagnant wages economy wide and across most industries.  Does this mean we cut funding to education?  No, but it does mean that the current problems in the labor market are not tied to a lack of education, and therefore education as economy policy will not boost growth as some propose. As Ilhan Ozturk wrote in his paper regarding the role of education in economy development:

Education in every sense is one of the fundamental factors of development. No country can achieve sustainable economic development without substantial investment in human capital. Education enriches people’s understanding of themselves and world. It improves the quality of their lives and leads to broad social benefits to individuals and society. Education raises people’s productivity and creativity and promotes entrepreneurship and technological advances. In addition it plays a very crucial role in securing economic and social progress and improving income distribution.

As Noah Berger and Peter Fisher wrote for the Economic Policy Institute (“EPI”) in 2013, increases in productivity have benefits for workers:

What can state governments do to boost the economic well-being of their people? That is the central question of state economic policy. Incomes and wages can increase across an economy when productivity—production per capita—increases. States have many tools in their arsenal to increase productivity, including investments in public infrastructure, in technological innovation at public universities and other institutions, and in workers through the education and training systems.

As for policy, the authors conclude:

Ultimately, the wealth of a society can increase only if the economy becomes more productive. A more productive economy can support both higher wages and higher profits, as well as shorter work weeks and a higher quality of life. So the question of how to increase productivity needs to be at the center of any debate about state economic development. . . . [P]roductivity rises with investments in infrastructure and workers, with investments in education that raise educational achievement providing a major boost. Thus, investing in education is a core contribution states can make to the well-being of their residents and the national economy overall.

As an organization, the EPI has long supported investments in education to promote economic growth, so It would appear then that this parallel between the EPI’s advocacy and Cutler’s proposal that investments in human capital are sound economic policy.  However, as worker productivity continues to rise in the United States, wages for college graduates have stagnated while underemployment for recently minted grads has increased.  The EPI has highlighted these two problems (see here, here, here, here, here, here, and here). While some of the wage stagnation problem can be resolved by including employee benefits and the like, college graduate underemployment is a problem with little explanation, and puts a wrench into those who believe that economic growth will follow our investments in education. However, this ‘education for all’ mantra ignores phenomena such as credential inflation where, as more people earn college/associate/high school degrees, the value of those degrees diminish and some degree holders end up working jobs that a generation ago did not require a college/associate/high school degree. An article written by economist Lawrence Mishel of EPI in January of this year notes (my emphasis):

The minimum wage is 23 percent less than its peak inflation-adjusted value in 1968. This is despite  productivity (how much output can be produced in an average hour of work in the economy) more than doubling in that time period. The low-wage workforce has surely contributed to this rise in economy-wide productivity, since as a group they have far more education now than they did then. For the workforce overall, 37 percent in 1968 had not completed high school (or received a GED), which was true for only 9 percent in 2012 (the latest year with comparable data). We can drill down to examine low-wage workers, which we are defining for this analysis as those earning in the bottom fifth of the wage distribution.

The figure below shows that low-wage workers have far more education now than they did back in 1968. In 1968, 48 percent of low-wage workers had a high school degree, compared to 79 percent in 2012. Correspondingly, many more low-wage workers have attended at least some college or have a college degree, which the graph identifies as ‘college experience.’ While only 16.8 percent of low-wage workers in 1968 had gone to some college or had a college degree, that group had grown to nearly half (45.7 percent) by 2012. The bottom line is that minimum wage in 2013 is far less now than it was in 1968 despite the economy’s productivity more than doubling, and low-wage workers attaining far more education.

Moreover, proponents of education as economic policy will often point to the college wage premium (the gap in wages between high school and college graduates) as evidence that going to college should be a foregone conclusion for high school graduates, which ignores the reality that the college wage gap is growing because wages for high school grads are declining as college grad wages stagnate.  This coupled with the findings of the EPI points to the realities of credential inflation.  While higher income earners have college degrees, assuming that if everyone had a college degree would be a high income earner is fallacious reasoning (i.e., all poodles are dogs but not all dogs are poodles, or, everyone with higher incomes have college degrees, but not everyone with college degrees has a higher income).

Another problem with credential inflation is that it distorts the college wage picture.  A person with a college degree working a low wage job may have received that job only because, ceteris paribus, he had a college degree whereas the other applicants had only high school degrees.  By that measure, then yes, we can say that the person’s wages are the result of a college degree without looking at the actual requirements of the job.  But that speaks to making laborforce participants more competitive with one another, not whether increasing education will enhance the economy by increasing the training and skills of our laborforce.  As a result, we get a somewhat skewed picture of the demand for college degrees in the job market.

Another problem with the assertion that investments in education result in higher economic growth such a proposition ignores the possibility of reverse causality.  As Cutler was quoted by the PPH:

States that are doing well economically are almost always the states that consistently have made investments in education, from early childhood through elementary and high school, to post high school and beyond throughout (their) citizens’ working lives.

But, as Paul Alghion et al wrote in their 2009 paper examining causal impact of education on economic growth:

Despite the enormous interest in the relationship between education and growth, the evidence is fragile at best.  This is for several reasons.  First, a state’s education investments are non-random.  States that are richer, faster growing, or have better institutions probably find it easier to increase their education spending.  Thus, there is a distinct possibility that correlations between education investments and growth are due to reverse causality.

While other factors impact business and economic growth, education and a skilled laborforce are key to that growth.  Investments in education are good, but there are limits to the positive results from investments in human capital.  As noted above, the returns from a college degree are decreasing as evidenced by stagnant wages and under-employment for college graduates.  This is a signal that there is not high demand for college degrees–of course, one will likely counter that college degrees are not fungible, and that the problem is certain degrees, namely in the STEM fields, are in high demand, but of course, the evidence there is lacking (see here, here, here, and here)–and the three outcomes are college enrollment drops, businesses increase wages, or policymakers work to increase demand for college educated labor.  Increasing the number of college graduates without addressing the issue of demand for those grads will only exacerbate the problem.

Investments in human capital are important, but policymakers need to be careful about falling into the trap of over-producing skilled labor.  Stagnant wages and rising under-employment suggest other policies must take precedent over furthering investments in human capital to boost economic growth.  This is not to argue that education does not play a role, but that it cannot be the central policy in moving the current economy.

John Haskell

About John Haskell

John graduated from the University of Southern Maine with a degree in Political Science, and from the University of Maine School of Law. He has worked in both the public and private sectors, and currently, works with a small business services company in the Mid-Coast area.