Understanding the relationship between a nation’s education system and its economic performance is crucial. This is particularly relevant when trying to comprehend why individuals with college degrees tend to earn substantially more than those without. By examining the interplay between education, training, and the economy, it is possible to gain insights into why some economies, businesses, and workers thrive while others struggle.
When the labor supply increases, it usually leads to a decline in wage rates unless the employers’ demand for labor keeps up with the supply. This oversupply of workers can be particularly detrimental to individuals working in industries with low barriers to entry, i.e., those jobs that do not require any specialized training or a degree. Conversely, jobs with higher education or training requirements tend to pay higher wages, which reflects the smaller labor supply capable of working in those industries, as well as the substantial costs associated with acquiring the necessary education and training.
How Education Benefits a Nation
Globalization and international trade require countries and their economies to compete with one another. Economically successful countries will hold competitive and comparative advantages over other economies, though a single country rarely specializes in a particular industry.
A typical developed economy will include various industries with different competitive advantages and disadvantages in the global marketplace. The education and training of a country’s workforce are major factors in determining how well the country’s economy will perform.
How Job Training Influences the Economy
A successful economy has a workforce capable of operating industries at a level where it holds a competitive advantage over the economies of other countries. Nations may try incentivizing training through tax breaks, providing facilities to train workers, or a variety of other means designed to create a more skilled workforce. While it’s unlikely that an economy will hold a competitive advantage in all industries, it can focus on several industries in which skilled professionals are more readily trained.
Differences in training levels are a significant factor that separates developed and developing countries. Although other factors are certainly in play, such as geography and available resources, having better-trained workers creates spillovers throughout the economy and positive externalities.
An externality can have a positive effect on an economy due to a well-trained workforce. In other words, all companies benefit from the external factor of having a skilled labor pool from which to hire employees. In some cases, the highly skilled labor force might be concentrated in a specific geographic region. As a result, similar businesses may cluster in the same geographic region because of those skilled workers—an example being Silicon Valley, Calif.
Ideally, employers want workers who are productive and require less management. Employers must consider many factors when deciding whether or not to pay for employee training, such as:
- Will the training program increase the productivity of the workers?
- Will the increase in productivity warrant the cost of paying for all or part of the training?
- If the employer pays for training, will the employee leave the company for a competitor after the training program is complete?
- Will the newly trained worker be able to command a higher wage?
- Will the worker gain an increase in bargaining power or leverage for a higher wage?
- If pay increases are warranted as a result of the training, will the increases in productivity and profits be enough to cover any pay raises as well as the overall cost of the training program?
Businesses may face employees who are unwilling to accept training. This can happen in industries dominated by unions since increased job security could make it more difficult to hire trained professionals or fire less-trained employees. However, unions may also negotiate with employers to ensure that their members are better trained and thus more productive, which reduces the likelihood of jobs being shifted overseas.
Workers increase their earning potential by developing and refining their capabilities and skills. The more they know about a particular job’s function and particular industry, the more valuable they become to an employer.
Employees may want to learn advanced techniques or new skills to vie for a higher wage. Usually, workers can expect their wages to increase, but at a smaller percentage than the productivity gains by employers. The worker must consider several factors when deciding whether to enter a training program, such as:
- How much extra productivity can they expect to gain?
- Is there a cost to the worker for the training program?
- Will the worker see a wage increase that would warrant the cost of the program?
- What are the labor market conditions for better-trained professionals in that field?
- Is the labor market significantly saturated with trained labor in that specialty?
Employers may pay for all or a portion of the training expenses, but this is not always the case. Also, a worker may lose income if the program is unpaid and they are unable to work as many hours as they had previously.
For the Economy
Many countries have placed greater emphasis on developing an education system that can produce workers able to function in new industries, such as science and technology. This is partly because older industries in developed economies have become less competitive and thus are less likely to continue dominating the industrial landscape. Also, a movement to improve the basic education of the population has emerged, with a growing belief that all people have the right to an education.
When economists speak of “education,” the focus is not strictly on workers obtaining college degrees. Education is often broken into specific levels:
- Primary—elementary school in the United States
- Secondary—middle school, high school, and preparatory school
- Post-secondary—university, community college, and vocational school
A country’s economy becomes more productive as the proportion of educated workers increases since educated workers can more efficiently carry out tasks that require literacy and critical thinking. However, obtaining a higher level of education also carries a cost. A country doesn’t have to provide an extensive network of colleges or universities to benefit from education; it can provide basic literacy programs and still see economic improvements.
Countries with a greater portion of their population attending and graduating from schools see faster economic growth than countries with less-educated workers. As a result, many countries provide funding for primary and secondary education to improve economic performance. In this sense, education is an investment in human capital, similar to an investment in better equipment.
The ratio of the number of children of official secondary school age enrolled in school to the number of children of official secondary school age in the population (referred to as the enrollment ratio) is higher in developed nations than in developing nations.
The enrollment ratio differs as a metric from calculating education spending as a percentage of gross domestic product (GDP), which doesn’t always correlate strongly with the level of education in a country’s population. GDP represents the output of goods and services for a nation. Therefore, spending a high proportion of GDP on education doesn’t necessarily ensure that a country’s population is more educated.
For businesses, an employee’s intellectual ability can be treated as an asset. This asset can be used to create products and services that can be sold. The more well-trained workers employed by a firm, the more that firm can theoretically produce. An economy in which employers treat education as an asset is often referred to as a knowledge-based economy.
Like any decision, investing in education involves an opportunity cost for the worker. Hours spent in the classroom mean less time working and earning income. Employers, however, pay higher wages when the tasks required to complete a job require a higher level of education. In other words, although an employee’s income might be lower in the short term, wages likely will be higher in the future once the training is complete.
The Cobweb Model helps to explain the effects of workers learning new skills. The model shows not only how wages fluctuate as workers learn a new skill but also how the supply of workers is impacted over time.
The model shows that as workers learn a new skill, higher wages occur in the short run. However, as more workers get trained over time and enter the workforce to chase higher wages, the supply of trained workers increases. Eventually, the result is lower wages due to an excess supply of workers. As wages fall, fewer workers are interested in those jobs, leading to a reduction in the supply of workers. The cycle begins again with training more workers and increasing their wages in the short run.
Since training and education take time to complete, shifts in demand for particular types of employees have different effects in the long and short term. Economists demonstrate this shift using a cobweb model of labor supply and labor demand. In the model below, the supply of labor is analyzed over the long term, but the shifts in demand and wages are viewed in the short term as they move toward a long-term equilibrium.