Human Capital and Higher Education: How Does Our Region Fare?

By Schiller, Timothy | Business Review (Federal Reserve Bank of Philadelphia), Spring 2008 | Go to article overview

Human Capital and Higher Education: How Does Our Region Fare?


Schiller, Timothy, Business Review (Federal Reserve Bank of Philadelphia)


Human capital refers to the technical skills and knowledge acquired by workers. Education is an investment in human capital, that is, in the skills and knowledge that produce a return to the individual in the form of higher earnings. Education also has social returns or spillovers. The presence of educated workers in a region enhances the earnings of those who, regardless of their own educational level, work with or near educated workers. This is especially true for spillovers from college-educated workers. Research shows that having large numbers of college graduates in a region increases that region's economic growth and that spillovers (also called externalities) are an important factor in generating more rapid growth. Aware of this connection, educators, state and local governments, and businesses around the country are making efforts to increase the educational attainment of their local work forces, especially the number of college graduates.

The number of people in a region who have a college education varies significantly across the nation. Parts of the three-state region (Pennsylvania, New Jersey, and Delaware) compare favorably with the nation on measures of college education, and the three states as a whole are close to the national average. In spite of its average ranking in the nation, the region is one of the premier locations for college education. The area's colleges and universities are important sources of college-educated workers for the nation and the world. In evaluating the region's standing with respect to college education, we must consider its important role as a producer of college graduates as well as its role as a user of college-educated workers.

[ILLUSTRATION OMITTED]

To help with this evaluation, I will review what we know about individual and social returns to education, look at college education as a stimulant to local economic growth, and compare our region to the nation as a source of, as well as a destination for, college graduates.

EDUCATION: AN INVESTMENT IN HUMAN CAPITAL

Education represents an investment in the knowledge and skills that increase people's ability to earn. The cost consists of the direct outlays for education as well as the opportunity cost of forgone income during the time spent acquiring the education. The return is the increase in earnings that results. Economists have measured the return to education over many years and found that it increases steadily for each level of education attained. (1) Data from the U.S. Bureau of Labor Statistics show that earnings rise and unemployment declines for each higher level of education (Table 1).

 
TABLE 1 
 
Unemployment and Earnings of Workers 25 Years and Older (2006) 
 
Education                Unemployment Rate Percent   Median Weekly 
                                                    Earnings Dollars 
 
Doctoral Degree                     1.4                  1,441 
 
Professional Degree                 1.1                  1,474 
 
Master's Degree                     1.7                  1,140 
 
Bachelor's Degree                   2.3                    962 
 
Associate's Degree                  3.0                    721 
 
Some College, No Degree             3.9                    674 
 
High School Graduate                4.3                    595 
 
Less Than High School               6.8                    419 
Diploma 
 
Source: Bureau of Labor Statistics 

The economic importance of education has been growing. Even as the number of college graduates in the labor force has increased, the wage gap between these workers and those with less education has widened. The increased wage reflects an increase in demand that has been greater than the increase in supply. Firms have been investing in new technologies that require more workers with the education and skills to use them, and more and more of the nation's economic growth has been originating in sectors with high demand for skilled workers. …

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