Educational achievement linked to economic growth

Editors note: Vange Ocasio Hochheimer, a newcomer to the annual Economic Forecast event and supplement, was asked to speak and write about the specialty topic of educational investments, rather than an economic forecast for 2020.

Many of us find the topic of economic development in our region exciting. After all, what is there not to like about new businesses, more jobs, higher incomes, less poverty, low crime and sprouting infrastructure?

Excitement about the prospect of increased economic growth can sometimes mask the crucial initiatives that are vital to achieving economic success. The expansion of human capital in the state, for instance, is vital to a productive labor force and sustained economic growth.

Human capital refers to the acquisition of knowledge and skills of the population. British economist Adam Smith outlined a positive correlation between education spending and economic growth. Smith argued that education spending creates benefits or positive externalities for society as a whole. Milton Friedman, another influential economist, echoed Smith's idea of positive externalities by exploring education and its "neighborhood effects." The idea of the "neighborhood effects" of education relies on the concept of positive externalities. An externality is broadly defined as a spillover effect of a policy. In the context of education, it means that education investment creates positive externalities and benefits society as a whole through "neighborhood effects" such as a skilled labor force, lower crime rates, good citizenship and civic engagement.

According to the literature on the long-term impacts of education, expanded education creates economic growth by enhancing the skills of the labor force and increasing the earnings of the population.

Enrico Moretti, a researcher with the National Bureau of Economic Research and an expert on the effects of education, has documented the economic and social returns to human capital. With respect to the correlation between education and earnings, Moretti finds that the output of plants in cities that experience substantial increases in college graduates rises more than the output of similar plants in cities with lower college graduates. Moretti also finds that increased schooling significantly reduces the probability of incarceration and reduces murder, assault and motor vehicle theft. He estimates that a 1% increase in the high school completion rate of all men between the ages of 20 to 60 would save the U.S about $1.4 billion annually in costs associated with mitigating crime. Other research by Moretti indicates that higher levels of education can result in better health outcomes for educated individuals and their children and it can also improve the quality of the democratic process by increasing informed voting in the U.S.

Most economist would agree with such linkages between education and such positive externalities. Can we trace similar education impacts in the state of Washington? The answer is a resounding yes.

A 2018 study by the Education Research & Data Center (ERDC) on the earnings premium of Washington higher education finds that higher academic degrees are associated with higher average earnings and that the more advanced the degree, the higher the earnings. Male workers who obtained a bachelor's degree earned 21.5% more than comparable high school peers who did not earn a degree and male workers who earned a short-term certificate earned 3.9% higher than their comparison group. The male workers who obtained a graduate degree earned 59.6% higher than their comparison group. The overall findings reflect a gender wage gap, but generally, earnings are higher with more education.

The earnings data presented here allow us to infer some of the implications of higher earnings in the state of Washington and in our Eastern Washington region. We know that higher earnings allow individuals to afford housing and spending on goods and services. This ability to participate in the market results in a robust real estate market and local economy as individuals gain purchasing power. Such economic gains in the state result in sustained economic growth over time.

The social effects stemming from insufficient education and hence low income can be traced in our state. The ERDC conducted a study this year on the education outcomes of children and youth experiencing homelessness. The study surveyed children's kindergarten readiness in six domains: social emotion, physical, language, cognitive, literary and math. The findings indicate that readiness in the six domains are 24.7% for homeless children and 46.6% for non-homeless children. The results are disappointing for both the homeless and non-homeless children but homeless kids are significantly less kindergarten ready. In terms of the findings related to youth, the study finds that 77.5% of non-homeless students compared to 45.8% of homeless students graduate from high school in five years.

Lack of education and low earnings lead to poverty, and poverty leads to a host of social maladies. This also is documented in our state. Using data from the Washington State Department of Social and Health Services, a 2018 ERDC study found that risk factors such as all alcohol-related deaths per 100 deaths, teen birth rate per 1,000 females 10-17, domestic violence offenses per 1,000 residents and accepted child abuse/neglect referrals rate per 1,000, are higher in schools with greater than 70% free and reduced meal enrollments than schools with fewer such students.

The connection between educational achievement and economic prosperity both for individuals and the local economy is clear. The "neighborhood effects" or positive externalities for the community are also evident.

The data supports the assertion that education is a clear pathway to social mobility and economic growth in the region. The appropriate education spending formula is beyond the scope of this article. However, if economic growth is a priority for our state, we must make the right investments in education. Curtailing investments in education would be counterproductive to sustained economic expansion and prosperity in the region.