The societal benefits of higher education : a report from the productivity and prosperity project (P3)

              The Societal Benefits of Higher
Education
April 2008
DENNIS HOFFMAN, Ph.D.
Professor of Economics,
University Economist and
Director, L. William Seidman
Research Institute
THE SOCIETAL BENEFITS
OF HIGHER EDUCATION
A Report from the Productivity and Prosperity Project (P3)
April 2008
Dennis Hoffman, Ph.D.
Professor of Economics, University Economist,
and Director, L. William Seidman Research Institute
Center for Competitiveness and Prosperity Research
L. William Seidman Research Institute
W. P. Carey School of Business
10BArizona State University
Box 874011
Tempe, Arizona 85287-4011
(480) 965-5362
FAX: (480) 965-5458
EMAIL: Dennis.Hoffman@asu.edu
www.wpcarey.asu.edu/seid
SUMMARY
The educational attainment of Arizona’s workforce is less than the national average and
has deteriorated over time relative to the U.S. average. Job quality and average earnings in
Arizona also are below the national average. These three factors — job quality, earnings, and
educational attainment — are interrelated. On average, the higher the educational attainment of a
worker, the higher are his or her earnings. The largest increase by far occurs with the completion
of a university degree. In Arizona, the average earnings of those with a college degree are
approximately $28,140 (73 percent) higher than those with only some college. Thus, working
individuals financially benefit from enhancing their educational attainment.
It is likely that the below-average job quality in Arizona disproportionately attracts a
workforce with below-average educational attainment, and also that the subpar educational
attainment in Arizona disproportionately attracts lower-wage job creation. If the state is to
achieve a higher job quality, along with higher wages and an enhanced standard of living for its
residents, it likely will be necessary to make changes in economic development policy and to
increase the educational attainment of the workforce.
The share of the Arizona workforce with at least a bachelor’s degree was approximately 1
percentage point less than the national average in 2000, but the differential may be close to 3
percentage points lower today. If the proportion in Arizona was 1 percentage point higher than
the actual figure, then an additional 30,320 workers would have a bachelor’s degree instead of
some college as their maximum attainment. Aggregate earnings would be $853 million higher,
resulting in increased spending at Arizona merchants and increased tax collections by Arizona
governments. Thus, monetary societal benefits also accrue when individuals enhance their
educational attainment.
In addition, an increase in the share of college graduates raises the earnings of other
workers as well. The benefits “spill over” to all workers due to enhanced worker productivity
associated with greater educational attainment. While the effect on other workers is modest — an
increase in earnings of less than 2 percent, or about $500 or less, per worker per year — these
effects apply to all 3 million members of the Arizona workforce. Thus, the aggregate spillover is
large at $1,262 million, exceeding the aggregate $853 million realized by those workers who
increased their educational attainment. The total societal impact therefore is $2,115 million per
year.
An increase in the share of college-educated individuals in the Arizona workforce could
be achieved through higher educational attainment of those who move to Arizona: an increase in
the share of more highly educated in-migrants (from elsewhere in the United States or from other
countries) and/or a decrease in the share of highly educated out-migrants. Similarly, an increase
in the share of college-educated individuals in the Arizona workforce could result from enhanced
educational attainment of Arizona’s youths and young adults.
It likely will take years to achieve an additional 30,320 college graduates (a 1 percentage
point increase in the share of college graduates) over and above the state’s natural rate of growth
in number of college graduates. Thus, the full $2.1 billion in higher annual earnings will not be
realized immediately.
Society benefits in other ways from a populace that is better educated. Nonmonetary
societal benefits in regions with high proportions of college graduates include lower crime rates,
greater and more informed civic participation, and improved performance across a host of
socioeconomic measures.
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EARNINGS AND EDUCATION
Workforce earnings are directly related to educational attainment: on average, the higher
the educational attainment of a worker, the higher are his or her earnings. As seen in Table 1,
while earnings rise with increased educational attainment across the entire distribution of
attainment, the largest increase by far occurs with the completion of a university degree. More
detail is displayed in Chart 1, splitting the bachelor’s degree or more category into two and
showing earnings by age. The conclusion is obvious — individuals benefit considerably from
enhancing their educational attainment.
TABLE 1
EARNINGS BY EDUCATIONAL ATTAINMENT IN ARIZONA IN 1999
All Who Worked During 1999 Full-Time, Year-Round Workers
4BMaximum Educational
Attainment
Mean
Earnings
Percentage of
the Total
Mean
Earnings
Percentage of
the Total
Total $31,638 $40,482
Less than High School 18,200 57.5% 24,194 59.8%
High School Graduate 24,271 76.7 30,655 75.7
Some College 29,343 92.7 37,380 92.3
Bachelor’s Degree or More 51,185 161.8 61,209 151.2
Source: U. S. Department of Commerce, Census Bureau, 2000 census, PHC-T-39.
CHART 1
MEAN ANNUAL EARNINGS BY AGE
AND MAXIMUM EDUCATIONAL ATTAINMENT IN ARIZONA
2BFull-time, Year-Round Workers, 1999
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
25-29 30-34 35-39 40-44 45-49 50-54 55-59
Age Group
Earnings ($)
Postgraduate University Graduate Some College
High School Diploma Some High School
Source: U.S. Department of Commerce, Bureau of the Census, 2000 Census Public Use Microdata
Sample.
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Further, the differential in earnings by educational attainment has increased over time,
with earnings by university graduates rising considerably. Chart 2 displays the earnings ratio
between those whose maximum educational attainment is a bachelor’s degree and those with less
educational attainment, using national data. The rising ratio reflects the transition of the national
economy to a knowledge economy in which highly educated individuals are especially valued.
EDUCATIONAL ATTAINMENT
The most commonly expressed measure of educational attainment is the maximum
education achieved by individuals aged 25 or older. Versions of this measure include the
percentage of the population who are at least a high school graduate and the share with at least a
bachelor’s degree.
Based on the percentage of the population aged 25 or older, educational attainment in
Arizona is similar to the national average. According to the 2000 census, the percentage of the
population 25 or older with at least a high school diploma was slightly higher in Arizona than the
national average, but the share with at least a bachelor’s degree was a little less than the U.S.
average.
Educational attainment based on all residents aged 25 or older does not necessarily
provide an accurate representation of the educational attainment of the workforce. In Arizona,
labor force participants have less educational attainment than their national counterparts. The
educational attainment of younger adults in Arizona is far below the national average while the
CHART 2
MEAN EARNINGS OF WORKERS AGED 18 OR OLDER IN UNITED STATES
RATIO OF THOSE WITH A BACHELOR’S DEGREE
TO THOSE WITH LESS EDUCATIONAL ATTAINMENT
1.00
1.25
1.50
1.75
2.00
2.25
2.50
2.75
3.00
1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005
Not a High School Graduate High School Graduate Some College
Source: U.S. Department of Commerce, Bureau of the Census, Current Population Survey.
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older population, especially those of retirement age, have much higher attainment in Arizona
than nationally (see Chart 3).
Educational attainment of labor force participants aged 25 to 64 is summarized in Table
2. (Results are similar for the labor force aged 18 to 64, though Arizona compares less
favorably.) Looking first at the figures from the 2000 census, the workforce in Arizona had
lesser attainment than the national average based on both the high school graduate and university
CHART 3
EDUCATIONAL ATTAINMENT IN ARIZONA IN 2000 RELATIVE TO THE NATIONAL
AVERAGE BY AGE GROUP, POPULATION 18 OR OLDER
-8
-6
-4
-2
0
2
4
6
8
10
18-24 25-34 35-44 45-64 65 or older
Age Group
Percentage
Point Difference
High School Graduate Bachelor's Degree
Source: U.S. Department of Commerce, Bureau of the Census, 2000 census, PHC-T-39.
TABLE 2
EDUCATIONAL ATTAINMENT OF LABOR FORCE PARTICIPANTS AGED 25 TO 64
Maximum Educational 8BChange
Attainment 1990 2000 2006 1990-2000 2000-2006
11BHigh School Graduate or More
United States 84.5% 87.8% 89.6% 3.3 1.8
Arizona 86.0 86.0 87.4 0.0 1.4
Arizona less United States 1.5 -1.8 -2.2 -3.3 -0.4
12BBachelor’s Degree or More
United States 24.8 28.6 31.8 3.8 3.2
Arizona 24.7 27.4 29.0 2.7 1.6
Arizona less United States -0.1 -1.2 -2.8 -1.1 -1.6
Source: U.S. Department of Commerce, Census Bureau, 1990 and 2000 censuses and 2006
American Community Survey.
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graduate versions of the measure. Comparing the 2000 census figures to those from the 1990
census and those from the 2006 American Community Survey, educational attainment among
Arizona’s workforce has deteriorated over time relative to the U.S. average. (Since the survey
error from one year of the American Community Survey is much greater than from the decennial
census, the change between 2000 and 2006 needs to be interpreted cautiously.)
EDUCATIONAL ATTAINMENT AND ECONOMIC DEVELOPMENT
Average earnings in Arizona in 2006 (the last year for which complete economic data are
available) were 5 percent less than the national average, calculated from U.S. Bureau of
Economic Analysis data that include proprietors as well as wage and salary workers. This
differential is typical of the historical record, as Arizona’s average earnings have ranged from
nearly equal to the national average in the early 1970s to more than 10 percent less in the early
1990s.
A number of factors contribute to lower average earnings in Arizona. Some cannot be
affected by public policy. For example, it appears that people are willing to move to Arizona and
accept a lower wage than they would demand elsewhere due to the perceived benefits of living in
Arizona, particularly the moderate winter climate. Other factors, such as job quality, can be
influenced by public policy, largely through economic development policies. Economic
development is defined broadly in this sense to include quality workforce development, quality
public infrastructure, an emphasis on quality of life and amenities, and maintaining a business
climate conducive to attracting quality employment opportunities.
Job quality — which in Arizona is less than the national average — is closely related to
educational attainment. It is unclear to what extent the below-average job quality in Arizona
disproportionately attracts a workforce with below-average educational attainment, and to what
extent the subpar educational attainment in Arizona disproportionately attracts lower-wage job
creation. It is likely that a dual relationship exists: (1) because a disproportionate share of the
jobs created do not require a university degree, the workforce has subpar educational attainment,
and (2) because Arizona’s educational attainment is below average, a lesser share of higher-quality
jobs are created in the state. Thus, if the state is to achieve a higher job quality, along
with higher wages and an enhanced standard of living for its residents, it likely will be necessary
to make changes in economic development policy and to increase the educational attainment of
the workforce.
THE SOCIAL FINANCIAL RETURN TO HIGHER EDUCATION
During 2006, approximately 3,032,000 Arizonans were part of the workforce. If the share
of the workforce with at least a bachelor’s degree had been one percentage point higher than the
actual figure, then 30,320 workers would have had a bachelor’s degree instead of some college
as their maximum attainment. On average, the earnings of those with a college degree are
considerably higher than those with only some college. Thus, substantially higher aggregate
earnings would have been present in Arizona, as seen in Table 3. (The mean earnings figures
include those working part time and/or less than year round.) The additional $853 million in
earnings would have resulted in increased spending at Arizona merchants and increased tax
collections by Arizona governments. Thus, in addition to the personal benefit realized by the
individuals with enhanced educational attainment, societal benefits would accrue as well.
The higher earnings of individuals with greater educational attainment is not the only
financial benefit to society that results from increasing the educational attainment of the
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workforce. According to Enrico Moretti in his 2004 Journal of Econometrics paper, “Estimating
the Social Return to Higher Education: Evidence from Longitudinal and Repeated Cross-
Sectional Data,” economists have speculated for at least century that the social return to
education may exceed the private return. Moretti was the first to quantify this, estimating the
effect on the earnings of all working adults from increasing the proportion of the workforce with
a university degree.
Moretti found that a 1 percentage point increase in the share of college graduates
(alternatively, a “1 percent increase in the proportion of college-educated workers”) raised wages
throughout the workforce. He estimated the increase in wages by the educational attainment of
workers:
• 1.9 percent among those with less than a high school diploma
• 1.6 percent among high school graduates
• 1.2 percent among those with some college
• 0.4 percent among college graduates.
Thus, it is not just individuals who benefit financially from enhancing their educational
attainment. Instead, the benefits “spill over” to all workers. This spillover can be traced to the
enhanced worker productivity associated with greater educational attainment. Improved
productivity results from the sharing of knowledge and skills across workers and from shifts in
the industrial mix to knowledge-based activities. These productivity gains translate into higher
output and earnings.
The aggregate impact of these higher wages is shown in Table 4. While the effect on
other workers is modest (an increase in earnings of less than 2 percent, or about $500 or less, per
worker per year), these effects apply to all 3 million members of the Arizona workforce. Thus,
the aggregate spillover (“Moretti effect”) is large at $1,262 million, exceeding the aggregate
$853 million realized by those workers who increased their educational attainment. The total
societal impact therefore is approximately $2,115 million per year.
As discussed in the prior section, for Arizona to realize a more educated workforce will
require changes in both economic development policy and educational policy. In order to achieve
an additional 30,320 college graduates (a 1 percentage point increase in the share of college
graduates) over and above the state’s natural rate of growth in number of college graduates likely
will take years to achieve. Thus, the full $2.1 billion in higher annual earnings will not be
realized immediately.
This analysis represents a point-in-time snapshot of the effects of a more educated
workforce based on the situation in Arizona in 2006. In reality, during the time it will take to
achieve the higher educational attainment and higher earnings, Arizona’s workforce will
continue to grow and the inflation-adjusted earnings of workers will continue to rise. Thus, to
achieve a 1 percentage point increase in the share of university graduates, more than 30,320
additional degrees eventually will be necessary, but the benefit will exceed $2.1 billion per year.
An increase in the share of college-educated individuals in the Arizona workforce could
be achieved through higher educational attainment of those who move to Arizona: an increase in
the share of more highly educated in-migrants (from elsewhere in the United States or from other
countries) and/or a decrease in the share of highly educated out-migrants. Similarly, an increase
in the share of college-educated individuals in the Arizona workforce could result from enhanced
educational attainment of Arizona’s youths and young adults.
Whether the enhanced educational attainment comes from migrants or existing
Arizonans, job quality in Arizona needs to be enhanced in order to retain these more highly
TABLE 3
CHANGE IN EARNINGS IN ARIZONA IN 2006
DUE TO THE HIGHER EARNINGS OF INDIVIDUALS ENHANCING THEIR EDUCATIONAL ATTAINMENT
Maximum Educational
Attainment Mean Earnings
Change in Number
of Workers
Aggregate Change
in Earnings (in
millions)
Some College $38,516 -30,320 $-1,167.805
Bachelor’s Degree or More 66,656 30,320 2,021.010
TOTAL 853.205
Source: Calculated from U.S. Department of Commerce, Bureau of Economic Analysis.
TABLE 4
CHANGE IN EARNINGS IN ARIZONA IN 2006 DUE TO THE MORETTI EFFECT
Maximum Educational Attainment
Mean Earnings in
2006
Moretti
Effect
Increase in
Earnings
Number of
Workers
Aggregate Change in
Earnings (in millions)
Less Than High School $23,606 1.9% $449 483,758 $217.207
High School Diploma 31,481 1.6 504 692,452 348.996
Some College 38,059 1.2 457 1,099,330 502.394
Bachelor’s Degree or More 66,390 0.4 266 726,168 193.161
TOTAL 1,261.758
Source: Calculated from U.S. Department of Commerce, Bureau of Economic Analysis and Census Bureau, and Moretti (2004).
7
qualified individuals. While an improvement in the educational attainment of workers in Arizona
by itself might result in somewhat better overall job quality, this would occur only with a lag.
Further, it is unlikely that improving educational attainment alone would have the effect of
creating enough high-quality jobs to meet the demand of the increased number of college
graduates. Thus, any strategy to enhance the educational attainment of Arizonans needs to be
paired with an economic development strategy to create a greater share of higher-quality jobs.
OTHER SOCIETAL BENEFITS FROM ENHANCED EDUCATION
Society benefits in other ways from a populace that is better educated. Nonmonetary
societal benefits in regions with high proportions of college graduates include lower crime rates,
greater and more informed civic participation, and improved performance across a host of
socioeconomic measures. Intergenerational social benefits may be very large as degree
attainment today translates into higher probabilities of degree attainment in future generations.
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THE PRODUCTIVITY AND PROSPERITY PROJECT
The Productivity and Prosperity Project: An Analysis of Economic Competitiveness (P3) is an ongoing
initiative begun in 2005, sponsored by Arizona State University president Michael M. Crow. P3 analyses
incorporate literature reviews, existing empirical evidence, and economic and econometric analyses.
Enhancing productivity is the primary means of attaining economic prosperity. Productive individuals
and businesses are the most competitive and prosperous. Competitive regions attract and retain these
productive workers and businesses, resulting in strong economic growth and high standards of living. An
overarching objective of P3’s work is to examine competitiveness from the perspective of an individual, a
business, a region, and a country.
THE CENTER FOR COMPETITIVENESS
AND PROSPERITY RESEARCH
The Center for Competitiveness and Prosperity Research is a research unit of the L. William Seidman
Research Institute in the W. P. Carey School of Business at Arizona State University. The Center
administers the Productivity and Prosperity Project: An Analysis of Economic Competitiveness (P3), and
the Office of the University Economist. These ongoing initiatives began in 2005 and are sponsored by
university president Michael M. Crow.
Specializing in applied economic and demographic research with a geographic emphasis on Arizona and
the metropolitan Phoenix area, the Center also conducts research projects under sponsorship of private
businesses, nonprofit organizations, government entities, and other ASU units.
Center for Competitivenes and Prosperity Research
L. Wiliam Seidman Research Institute
W. P. Carey Schol of Busines at Arizona State University
PO Box 874011 | Tempe, AZ 85287-4011 | P (480) 965-3961 | F (480) 965-5458 | wpcarey.asu.edu/seid