The purpose of this paper is to describe the impact of investment in education on U.S. economic growth. Beginning with the seminal contributions of Becker [1964], Mincer [1974], and Schultz [1961], economists have found it useful to characterize the benefits of education by means of the notion of investment in human capital.(1) This idea captures the fact that investment in human beings, like investment in tangible forms of capital such as buildings and industrial equipment, generates a stream of future benefits. Education is regarded as an investment in human capital, since benefits accrue to an educated individual over a lifetime of activities.
One of the most important benefits of education is higher income from participation in the labor market. This increase in income is the key to understanding the link between investment in education and economic growth. People differ enormously in effectiveness on the job. Substituting more effective for less effective workers increases output per worker. More highly educated or better trained people are more productive than less educated or poorly trained people. However, education and training are costly, so that substitution of people with more education and training requires investment in human capital.
The most common approach to compiling data on educational investment is to measure the inputs, rather than the outputs, of the educational system.(2) Data on the expenditures of educational institutions for teachers and other personnel, buildings and equipment, and materials can be compiled from accounting records. This information can be supplemented by estimates of the value of time spent by students (and their parents) as part of the educational process. Costs of schooling and the value of the time spent by students can be used to measure the flow of resources into schools and universities.
While the costs of education are highly significant in economic terms, the cost-based approach to measurement of educational investment ignores a fundamental feature of the process of education. This is the lengthy gestation period between the application of educational inputs–mainly the services of teachers and the time of their students–and the emergence of human capital embodied in the graduates of educational institutions. Furthermore, some of the benefits of investment in education, such as greater earning power, are recorded in transactions in the labor market, while others–like better parenting or more rewarding enjoyment of leisure–remain unrecorded.
A measure of output is needed to put the education industry on par with other industries producing goods and services. This measure must reflect the fact that education is a service industry, but its product is investment in human capital. Since the effects of formal schooling endure through the lifetime of an educated individual, the authors employ the impact of education on an individual’s lifetime income as a measure of educational output. A second important idea is that education enhances the value of activities outside the labor market, such as parenting or the value of leisure time. The estimates of the output of the education sector incorporate the value of time spent outside the labor market.
In measuring investment in education, the first step is to compile data on the economic value of labor market activities. In Section II of the paper, it is shown that the constant dollar value of time spent working has doubled in the postwar U.S. The growth of this value has been greater or the decline has been less for women than for men at all levels of educational attainment. This reflects the rapid increase in labor force participation by women relative to men. The proportional increase in the value of market labor time has been greatest for college educated men and women. This corresponds to the substantial growth in levels of educational attainment.