Education and Economic Productivity

Economists like to refer to productivity as a measure of how efficiently an economy is performing.  Of particular interest is the rate at which productivity is growing because there is a correlation between economic growth (in GDP) and growth in productivity.  This source provides a standard definition of the term.

“Productivity is commonly defined as a ratio between the output volume and the volume of inputs. In other words, it measures how efficiently production inputs, such as labour and capital, are being used in an economy to produce a given level of output. Productivity is considered a key source of economic growth and competitiveness and, as such, is basic statistical information for many international comparisons and country performance assessments.” 

All economic statistics are uncertain, including the determination of productivity, and there is more than one way to define it.  Nevertheless, there appears to be near universal acceptance of the fact that productivity growth has been trending downward in recent decades, perhaps extending as far back as the 1980s.  This conclusion extends to most wealthy nations, including the United States. 

A few years ago, the article 23 economic experts weigh in: Why is productivity growth so low? appeared.  These 23 experts produced nearly 23 different opinions on what the cause might be.  Not one of them mentioned education directly.  Thomas Piketty took a long-term look at the rise in productivity over time in his book Capital and Ideology and concluded that, historically, the level of a nation’s productivity was closely correlated with the universality of the level of education within its borders.  This correlation was particularly strong as universal primary and then universal secondary education (high school) were implemented.  The argument made was that as technologies and business practices became more complicated, a higher level of education became more important.  The countries who moved to universal education earliest attained the highest productivities. 

The era of presumed low productivity growth coincides with the move to greater participation in tertiary education (college).  One could assume that the huge increase in college attendance would also lead to continuing growth in productivity.  However, that does not seem to be the case.  Does this indicate that something has gone wrong with how college-level education has been implemented?

Let us consider the data presented by Piketty.

“At the beginning of the nineteenth century, the US population was small compared with the populations of Europe, but a larger proportion of Americans went to school.  The data we have, mostly taken from census reports, indicates that the primary schooling rate (defined as the percentage of children ages 5-11, both male and female, attending primary school) was nearly 50 percent in the 1820s, 70 percent in the 1840s, and more than 80 percent in the 1850s.  If we exclude the black population, the primary schooling rate for whites was more than 90 percent by the 1840s.  At the same time, the comparable rate was 20-30 percent in the United Kingdom, France, and Germany.  In all three countries it was not until the period 1890-1910 that we find the near universal primary education that the United States had achieved a half century earlier.”

The strong public education system allowed the US to take advantage of the European brain drain provided by immigration.

“Another reason for the American lead was a phenomenon we see today among migrants.  Individuals in a position to emigrate to the United States in the eighteenth and nineteenth centuries were on average better educated and more inclined to invest in the education of their children than the average European of the time, even controlling for geographic and religious origins.”

The US would move towards universal secondary education and maintain its educational advantage until the 1980s. 

“The key point here is that America’s educational lead would continue through much of the twentieth century.  In 1900-1910, when Europeans were just reaching the point of universal primary schooling, the United States was already well on the way to generalized secondary education.  In fact, rates of secondary schooling, defined as the percentage of children ages 12-17 (boys and girls) attending secondary schools, reached 30 percent in 1920, 40-50 percent in the 1930s, and nearly 80 percent in the late 1950s and early 1960s.  In other words, by the end of World War II, the United States had come close to universal secondary education.  At the same time, the secondary schooling rate was just 20-30 percent in the United Kingdom and France and 40 percent in Germany.  In all three countries it is not until the 1980s that one finds secondary schooling rates of 80 percent, which the United States had achieved in the early 1960s.”

It was not lost on the Europeans that the US gained an advantage, economically, socially, and politically, from its increased investment in education.  The value and need for a better-educated workforce followed the increase in complexity of the working environment.  Where once the ability to follow orders and work diligently was sufficient, eventually the need to write and to read and understand more complex documents such as manuals became more necessary.  Finally, technology and advanced product development would require expansion of tertiary education to a greater fraction of the population.  At this point, France and Germany would catch up, and for a time, lead the US in productivity before stagnating at the about the same level.  The United Kingdom would never catch up and seems to operate permanently at a lower level of productivity.  There is something to be learned from this data.

Piketty defines productivity as the gross domestic product (GDP) per hour of work in the economy expressed in euros at purchasing power parity.  Data for the US, Germany, France, and Britain are provided over the years from 1950-2015.

The US is clearly ahead of the Europeans in productivity in the postwar era.  In this formulation it is only over the past 10-15 years that any diminished slope in the productivity curves becomes apparent.  The French and Germans follow essentially the same track and catch up to the US, but the British never do.  In fact, they never even close the gap.  If, as Piketty claims, education is so important to productivity, what is it about Britain that suppressed the gains that were made by France and Germany in spite of spending about the same fraction of national income on education?  Piketty offers an explanation. 

“The British system in particular remains one of strong social and educational stratification, with stark differences between lavishly endowed private schools and garden-variety public schools and high schools—differences that explain some of Britain’s lag in productivity…”

Piketty explains why we should understand the British system by suggesting that our implementation of college-level education is copying the worst of the British practices.

“How did the United States, which pioneered universal access to primary and secondary education and which, until the turn of the twentieth century, was significantly more egalitarian than Europe in terms of income and wealth distribution, become the most inegalitarian country in the developed world after 1980—to the point where the very foundations of its previous success are now in danger?  We will discover that the country’s educational trajectory—most notably the fact that its entry into the era of higher education was accomplished by a particularly extreme form of educational stratification—played a central role in this change.”

During the first half of the twentieth century in the US, when secondary education was expanding throughout the population, public education predominated.  Private education was for a minimal number of the wealthy.  A person with a high school diploma could apply for a job and be judged by how well he or she could perform.  There was no national ranking of high schools that would allow an employer to discriminate against those from lower-ranked schools.  And there were no national tests that would allow the same form of discrimination. 

The situation would change when the expansion of college education took of in the second half of the century.  The elite colleges and universities were mostly private and used to dealing with the wealthy and socially elite.  Although these schools would expand their enrollment and extend a welcome to women and minorities, they would continue to service mostly the wealthy, even if some of the wealthy could now be members of a minority.  College ranking services would exacerbate the perceived excellence of the elite universities by holding beauty contests, asking people which they thought were the best universities.  Since the elite ones were the only schools with which most were familiar, the elite status became documented and quantified.  The result of this simplistic approach was to relegate many very good educational institutions to second-class status.  Now employers would have access to rankings which would allow them to discriminate against candidates from non-elite schools. 

The few elite universities could then charge large rates of tuition and find willing takers.  Thankful for being provided the pathway to high income, alumni would contribute large sums to the endowment of their school, particularly when they wanted their own children admitted.  And to no one’s surprise, the largest endowments earn the largest return on investment allowing them to invest even more in their excellence, or in the perception of excellence.

This perception that all but a few elite schools are second class becomes apparent in comparisons with international universities. 

“If one looks at the available international rankings, as imperfect as they are, it is striking to see that American universities are ultra-dominant among the top twenty in the world but fall well below European and Asian universities if one looks at the top 100 or 500.  It is likely that the international renown of the wealthiest US universities masks the internal imbalance of the system as a whole.”

Piketty provides data to support this notion of stratified higher education in the US.  There is a direct correlation between parental income and access to a college education. 

Access to a college education is further limited by the cost to the student for that education.  Whereas primary and secondary education is publicly provided, advanced education expenses are largely borne by families—as in Britain 

While the expense of a college education has been going up much faster than general inflation, stagnant incomes at the middle and lower levels have made it increasingly more difficult for the majority in the US to access higher education.  And when they do it is often at institutions that provide little return on that investment.

Higher education provides a path to opportunities to contribute to the enhancement of productivity.  The intelligence, knowledge, and creativity necessary to produce such a contribution are not limited to the wealthy few with access to elite universities.  Just as economic inequality reduces the ability of much of the population to contribute to economic growth through consumption, it also reduces the ability of the same segment to contribute to the enhancement of productivity. 

 It is not the number of people capable of contributing to productivity in the economy that is important.  It is the number of capable people who are provided the opportunity to contribute.  Opportunity is the controlling factor and a meritocratic aristocracy does not get it done.