Forget stock market returns - education is the best investment you can make

Despite speculation over whether a higher education is ‘worth the cost’ in the midst of rising tuition fees, a study proves that being educated pays dividends in the long run, and is actually more lucrative than investing in the American stock market.

Does education pay?

According to a comprehensive research review conducted by by the World Bank’s George Psacharopoulos and Harry Patrinos, it certainly does.  By aggregating and analysing 1,120 studies across 139 countries, the pair discovered that over the past 50 years, the annual average “rate of return”, or pay premium from an extra year of schooling totalled 8.8%. To put this into perspective, America’s stock market returned an annual average of 5.6% over the same half a century.

Contextual factors

8.8% is an average, and of course figures fluctuate depending on the country and demographic in question. For instance, the premium is higher for girls and in primary education, and is also increased in lower and middle-income locations. Perhaps this is because fewer people are educated to a higher level, therefore those who are can command higher pay in comparison.

“Overall, the average rate of return to another year of schooling is 10 percent... The highest returns are recorded for low and middle-income countries. This update includes new country estimates and updated estimates for 42 countries.

Average returns to schooling are highest in the Latin America and the Caribbean region and for the Sub-Saharan Africa region. Returns to schooling for Asia are at about the world average. The returns are lower in the high-income countries of the OECD. Interestingly, average returns to schooling are lowest for the non-OECD European, Middle East and North African group of countries.

During the last 12 years, average returns to schooling have declined by 0.6 percentage points. At the same time, average schooling levels have increased. Therefore, and according to theory, everything else being the same, an increase in the supply of education has led to a slight decrease in the returns to schooling.

Overall, women receive higher returns to their schooling investments. But the returns to primary education are much higher for men (20 percent) than for women (13 percent). Women, however, experience higher returns to secondary education (18 versus 14 percent).”

(An excerpt from the report by George Psacharopoulos and Harry Anthony Patrinos.)

Private returns to investment in education by income - Report

 Mincerian returns to education by gender - Report

Investing in the future

The report focuses on monetary gains, but the social and cultural benefits can be explored alongside the fiscal factors. The increase in return across the board has incentivised governments around the world to invest more GDP share in the education sector, as evidenced in the graph below. This is illustrated in part by the increasing popularity of private schooling and tutoring, and those who don’t invest risk falling behind.

 Government expenditure on education, total (% of GDP) - The World Bank

Between 2004 to 2014, government expenditure on education increased by around 21.5 per cent.

Psacharopoulos and Patrinos suggest that we are currently - and have been for some time - witnessing a “race between education and technology”; an ever-increasing amount of people educated to degree levels is pushing returns down, yet the demand for high-level skills in the wake of technological advancements has worked in the other direction.

Either way, the message rings clear: an educated population enriches a country - in more ways than one.

You can read the full report, Returns to Investment in Education: A Further Update, here.