Does more education mean higher productivity and growth?

Education, Education and More Education

In my last post, I discussed the trials and tribulations of my younger self going through China's education system, highlighting the emphasis that China (and several other countries) places on education. A commenter noted that :

"If China has a crisis, many young Chinese today do not have the endurance nor the developed expertise to compete effectively in a global environment where cheap labour is no longer a comparative advantage."

And that is a fair comment because it is true that whilst pre-university education in China ranks amongst the best in the world as evidenced by their top ranking performance in internationally standardised tests such as the Trends in International Mathematics and Science Study (TIMSS) and Program for International Student Assessment (PISA), higher-education still falls short of western standards where knowledge based capital is suppose to matter more for driving economic growth and not raw human capital.

I disagree and here's why.

More education ≠ More productivity

We often associate a productive economy as one with higher stock of educated people which simply isn't true. For instance, we could correlate China's miracle growth since their economic reforms of the 1970's with an increase in literacy rate from under 65% in the 70's to over 95% today. But that would suggest that the amount of productivity-related knowledge an average worker needs to possess for their job(s) has increased. If anything, it has fallen, and more evidently in more developed countries where a greater proportion of the workforce are now employed in low-skilled service jobs that do not require much education.

China's adult literacy rate (15+)

Moreover, as economies improve, a higher proportion of knowledge is embodied in machines. Thus, increases in economic productivity may even lead to workers requiring less understanding of what they're doing than their counterparts in the past. A prime example would be check-out assistants who do not even need to know basic arithmetic, a skill which their predecessors would definitely have needed.

The effect of rising mechanisation of industries as a fast track way to increase productivity has some side effects however. Workers are easier to substitute and more technologically advanced economies may in fact need fewer educated people.

Not all education is meant to raise productivity

Many subject areas have little to no direct relationship to increased economic productivity. For example, Classics, History, Philosophy and Music. From a fundamental economic view, these subjects and many others would have little impact on economic productivity and would be considered a waste of time. They are taught because we believe they enable people to lead more enriching and fulfilling lives, not for their contribution to productivity growth.

The Fallacy of Higher-Education

Given the points discussed above, we could argue that whilst the average worker needn't be more educated, for economic development and productivity growth, we would require more educated people coming from higher-education right?

Wrong (Kind of)

The best example would be Switzerland. A highly productive, and highly industrialised country that ranks in the top 10 of richest countries by GDP per capita ($58,647). Switzerland has by far the lowest university enrolment of any country in the developed world. According to UNESCO, the rate of university enrolment in Switzerland is 57% in 2014, compared to 84% in US. Historically, this figure was even lower in the 1990's going as low as 16% which was less than half the average of the OECD average of 34%.

IMF figures for GDP (PPP) Per Capita in terms of Int$

The question naturally becomes how Switzerland is able to remain at the top of the international productivity league despite providing much less higher education?

We could argue that the quality of education at these universities may differ country to country. For instance, if New Zealand universities are not as good as Swiss universities qualitatively speaking, then it might explain why Switzerland is richer than New Zealand (In terms of GDP PPP Per Capita) despite a lower proportion of the Swiss having university education compared to New Zealand. But what if we made the comparison with the US? Surely we can't argue that the Swiss universities are so much better such that they can get away with significantly lower enrolment rates than the US?

What this suggests is again, the low productivity content delivered at higher-education. Rather, the non-productive components delivered at higher-education are less about the subjects which deliver enriching lives and personal fulfilment (which is more the case for secondary and primary schools) and more about what economists call the sorting function.

Of course, we cannot deny that Higher-Education imparts important productivity related knowledge to it's students, but another perhaps more important role of Universities is establishing an individuals ranking in terms of employability.
In most lines of work, intelligence, organisation and the capacity to learn matters more than the specialist knowledge you learnt at university. In most cases, these specialised skills and knowledge areas will be obtained through working the job. Thus by graduating from university, you are demonstrating that you are likely more intelligent, more organised and have a higher capacity to learn than those who have not. And these are the general qualities that employers look for, not the specialist knowledge you might possess but may be irrelevant to your job.

You stand, I stand, we all stand

The problem is, the emphasis on higher-education has lead to countries expanding their higher-education systems to allow for more people to get a degree. (Often in the belief that more graduates = better productivity!) And once the proportion of people going to university crosses a certain threshold, it becomes a necessity to go to university just to get a decent job.

For example, if 50% of people go to university, then by not going to university, you would be implying that you are in the bottom half of the ability distribution. If you want a good job, then you feel obligated to go to university despite fully knowing that you will waste your time studying things you won't need for work. More demand for university places leads to more supply, and this in turn increases the enrolment rate further, making the pressure to go to university even higher. This eventually leads to degree inflation and the pursuit of even higher education such as masters and PhD's just to stand out from the crowd. Where before you believed getting a degree was a waste of time but a necessary formality to get a decent job, now even more time has to be wasted on getting masters and PhD's, even when the productivity content of these further degrees remain minimal for your future job.

With Switzerland, they were able to rank as one of the highest productivity nations in the world in the 1990's with just a higher-education enrolment of around 16%. Today, their enrolment figures are nearer 50% which still means that they are ranking ahead of the US in terms of GDP (PPP) Per Capita despite having 40% less University enrolment. What this means is that 40% or more of the people in countries with comparable enrolment ratios to the US are wasting their time in the zero-sum game of sorting.

Higher Education is now like a theatre where people stand up to get a better view, triggering people behind them to stand. Once enough people stand, everybody has to stand and nobody gets a better view, but everybody feels less comfortable.

Education and Productivity : Take 2

After all of this, you might think that i'm against education, specifically higher education. I'm not. I'm a graduate, and I'm also guilty of studying double master degrees for the reasons I mentioned above. I believe that education is extremely valuable, but not for the purposes of raising productivity of an economy. I believe education develops potentials in individuals, and allows them to live more enriching and fulfilling lives.

What is evident however, is the productivity and economic prosperity of a nation is largely determined by how that nation organises individuals into enterprises with high productivity. Paying specific attention to supporting organisations for productivity growth. Not on mindlessly producing more graduates in the hopes of significant upticks in productivity.

China has a low university enrolment ratio of only 23%, and yet the positive rate of change of productivity and economic growth is indisputable. They may not have the highest quality University education system, but they do make up for it by organising their citizens into collective entities with high productivity.