New Evidence That Education Does Raise Productivity

Does education increase the productivity of workers – as in Gary Becker''s Nobel Prize-winning work on ''human capital'' theory? Or is it simply that more productive workers invest more in their education in the first place – as suggested by Michael Spence''s Nobel Prize-winning work on ''signalling'' theory?

New research by Dr Arnaud Chevalier and colleagues looks at how raising the school leaving age in 1972 affected a large nationally representative selection of individuals in England and Wales. The results, published in the November 2004 Economic Journal, show that the change only raised the educational achievements of early school leavers – which is strong evidence for the human capital story that education does increase productivity.

This question of whether human capital or signalling theory is the closest representation of reality is of more than academic interest. Human capital theory implies that education can be used as a policy instrument – for example, subsidising tuition costs will raise education and hence productivity and earnings. If education only signals workers'' ability, then any subsidy to education has no return. Like many important questions, the answer is elusive – both theories imply a positive relationship between education and earnings, so it''s hard to discriminate between them. This study tries to exploit the different motivations people might have for investing in education: to increase their absolute productivity in the case of human capital theory; or to increase their relative ability in the case of signalling theory.

In 1972, the minimum school leaving age was raised from 15 to 16 in England and Wales. According to signalling theory, this should have raised education at all levels as all individuals increase their educational investment to maintain their relative positions. According to human capital theory, the reform will only increase the education level of people directly affected by it, that is, early school leavers.

The research uses a large nationally representative dataset of individuals from England and Wales to test this hypothesis. The authors report tests that show no statistically significant change at higher levels of education. They conclude that education actually does raise productivity. The test consists of predicting the highest qualification attained for cohorts of individuals in school around the time of the reforms. There is a sharp change in the proportion of pupils gaining CSE and, for women only, O-levels, after the reform. But there are no significant variations in the achievement of higher level qualifications – in other words, the proportion of individuals obtaining A-levels or university degree is the same before and after the reform.

''Does Education Raise Productivity, or Just Reflect it?'' by Arnaud Chevalier, Colm Harmon, Ian Walker and Yu Zhu is published in the November 2004 issue of the Economic Journal. Chevalier and Zhu are at the University of Kent, Canterbury; Harmon is at University College Dublin; Walker is at the University of Warwick and the Institute of Fiscal Studies (IFS).