The Rate Of Return On Education : Human Capital Theory And Signalling Models

An education provides people not only with the academic skills required, but also the social skills such as having the self confidence and belief in ones self to achieve a fulfilling and happy life. It is every child’s human right to receive such an education from early years to higher, and therefore several stages in which they must travel for this to happen.

Providing opportunities for learners to practice the skills they need often means hiding them on normal learning activities as many students are resistant to Maths, Literacy and information Communication Technology (ICT) classes. The idea of functional skills was developed by Government to “provide essential knowledge, skills and understanding that will enable people to function confidently, effectively and independently in life and at work” (Gravells, 2012).

Education has various connections with almost every aspect of everyone’s life. Thus, the higher the level of education people are able to reach, the more benefits it has on the individual’s life and the society in general. Therefore, David Leonhardt argues in his article “Is College Worth It? Clearly, New Data Say” that the decision not to attend college is “among the most economically irrational decisions anyone could make,” in spite of the cost of attending college which will be paid off in the long run. Consequently, high education is considered as a major factor in solving economic problems and improving the economy, among other solutions.

In Stephanie Owen’s and Isabel Sawhill’s article “Should Everyone Go to College” the return on the investment in college is briefly broken down. The article “Should Everyone Go to College” opens up with a widely known claim that a college degree is necessary to enter the middle class. Owen and Sawhill test this claim by comparing the return on an education of general types of degrees and colleges. The article states that on average high school graduates make around $15,000 less a year than graduates with a bachelor’s degree. To further the prove the return on your investment in education the articles states that by the age 50 a person with a bachelor’s degree makes around $46,500 more a year than a high school graduate. This accumulates to

Education is the foundation of a person’s success and way of life. Graduating from school is important not only for an individual, but it helps the local and national economy. A study by the Alliance for Excellent Education shows that with higher graduation rates among high school students, the economies of cities, states, and of the country would increase (Rollins). Compared to the rest of the world, the United States spends a large amount of money on education (U.S. Education). While many may think this sufficient, Professor Bruce Baker discusses the correlation between supporting schools with federal funding and the success of students, “When schools have more money, they have greater opportunity to spend productively. When they don’t, they can’t” (ii, Baker). If students are to graduate and contribute to the boost of economies, education must be the forefront of federal funding.

A point often overlooked by Owen and Sawhill is the topic of the rate of return on education- how much more earnings those who attended one more year of school received. By comparing identical twins with a difference in education level, records have sown that these earnings are increased by ten percent. They discuss that the “raw difference between high school graduates and associate’s degree holders is about $7,000, but a return of 10% would predict the casual effect of those additional two years to be $6,000” (210). Furthermore, the cost of college is also a vital factor; someone who has to pay a large amount in order to attend their college of choice will end up having a lower net benefit. When a young adult

Becker and Murphy argue that “the growth in returns to college has generated a predictable response: as the education earnings gap increased, a larger fraction of high school graduates went on to college.” (583). Potential generated by higher returns to education extends from individuals to the economy as a whole. (585). Higher earnings from education will increase peoples’ living standards, and the more people invest into their education the greater the return they will get out of it further increasing living

A good education is vital in succeeding within many industries in the UK, from Business to Medicine, Politics to Art. It unfortunately does not come as a surprise that only 58.6% of students attained 5 or more GCSE’s at grades A* to C (Department for Education 2012). In comparison, albeit falling this year on previous years, 94.4% of students in private schools attained the same results (The Independent 2012a). Following the recent recession, Social mobility has begun to decline and is lower today than it was thirty years ago. It is now less likely that a child of parents in a low-income bracket will rise to the top-income bracket than it was in

“ Human capital is what makes individuals productive, and productivity is what determines our standard of living.”(Wheelan, 130). By investing in human capital, we are able to have more skilled workers who are productive and positively affect the economy because we make more contribution and therefore will get more in return.

The recession has demonstrated the social and economic affects of higher education on society, with the recession having a greater, negative, affect on individuals who attained lower levels of education . The unemployment rate in 2009 was lower, with higher average wages, for people who did not drop out of school and was successful with higher education . This is suggesting that education, beyond GCSEs, has become “essential” for 21st century careers . This is supported by the inflation of examinations being taken , which is reducing “the relative economic value” of the qualification . This means for stronger financial development in a career, more education is required – as well as experience in the field to stand out against other candidates.

Though many people have been questioning whether education is a wise investment, research has shown that the benefits of education still outweigh the costs. Different education levels have different returns in terms of investment. Despite the rate of college-educated workers rate of unemployment remaining low, they are struggling to fit in the job market. What amounts to uncertainty in the benefit of college education is the struggle that comes in paying education loan debts and the rising cost of education. With the return on investment in education remaining at 15%, most people would argue that is not a sound investment. Those with less education struggle more especially in the past decade.

The decision to invest in human capital is influenced by considerations similar to those that motivate a firm to invest in physical capital: the cost of the investment verse the expected return. For example, investing in a college education may require the one borrow the money for tuition. If the interest rates on the loan rise then people will most be less likely to invest in a college education. Thus, investment in education may be negatively related to the interest rate, much as physical investment is. This is one reason why, in order to encourage economic growth and productivity, the U.S government provides low interest loans for college

The topic of the value of a highly educated populous is important for many reasons individuals with higher levels of education earn more and are more likely than others to be employed. Median earnings of bachelor’s degree recipients with no advanced degree working full time. “In 2011 were $56,500, $21,100 more than median earnings of high school graduates” (Phelps 2). Individuals with some college but no degree earned 14% more than high school graduates working full time. Their median after-tax earnings were 13% higher (Figure 1.1). Compared to a high school graduate, the median four-year college graduate who enrolls at age 18 and graduates in four years can expect to earn enough by age 36 to compensate for being out of the labor force for four years, as well as for borrowing the full amount required to pay tuition and fees without any grant assistance. Expanding enrollments are a public good that should perhaps be increased to a greater degree than in recent years, especially with grant aid to those in tougher financial

It is commonly accepted in theory and in empirical results, that in general, a higher level of education will yield a higher wage (Acemoglu and Autor 2011). In recent years there are studies to suggest that the importance of education has increased (Atkinson 2008). Goldin and Katz (2007) found that the economic returns of completing high school today appear substantial and the economic benefits to college and post-college schooling are at historically high levels. Additionally, the wages of US individuals that have a postgraduate degree have increased significantly since 1979. Although a number of studies points towards education in itself not being relevant to the wage level but that education acts as a signal of ability to employers (Jeager and Page 1996).

Kozol pointed out that it is hard to convince young people that they can learn and can become educated within their early years when they are continuously cordoned off by society that isn’t sure they really can (p. 37). Sadly, they could have excelled but they often weren’t provided with the opportunity.