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Why College Matters

December 07, 2009 By Lauren Benditt, Higher Education Policy Associate
In the last century, the United States in general, and Minnesota in particular, was able to depend on agriculture and manufacturing to meet the supply of low- and mid-skilled labor. However, the changing economy, with its move toward high-tech jobs (including those in agriculture and manufacturing), is making higher education an increasingly necessary prerequisite to Minnesota's capacity for continued competitiveness, productivity and innovation.

Education has traditionally been the primary means for developing human capital in the United States, and economists and policymakers alike tend to agree that the key to a successful economy is a workforce that can fill high-skill jobs.

Promoting higher education provides other economic benefits in addition to developing a skilled workforce for our state.  Recent national research by Holzer and Lerman has demonstrated that individuals who obtain an associate's degree make 33 percent more, on average, than do individuals with only a high school diploma; a bachelor's degree brings, on average, 62 percent more than a high school diploma.1

Economists have also developed models to quantify some of the social benefits that spill over in urban areas with high concentrations of post-secondary educated individuals. For example, interpersonal interactions are a means for passing information and skills between workers, thereby increasing productivity and producing economic benefits.2 Krueger and Lindahl also indicate that higher levels of education also reduce costs in an area via reductions in crime rates and lower welfare participation.3 It has also been argued that a higher proportion of post-secondary education attainment leads to positive indirect economic effects because a well-educated population makes better policy choices that affect the economy.4

But, after wading through the theory, how might these economic spillover effects actually affect the average Minnesotan?

Well, higher education spillover benefits may be producing higher wages for all Minnesotan workers. In his 2004 paper, Enrico Moretti modeled the impact of density of individuals haven obtained a post-secondary degree on wages in metropolitan areas.5 His model indicates that a 1 percent increase in the share of college educated workers raises the wages of high school drop-outs by 1.9 percent, of high school graduates by 1.6 percent, of individuals with some college by 1.2 percent and of college graduates by 0.4 percent. For example, if the share of college graduates in the Twin Cities metro area increased by 1 percent, the predicted increase in wages for a worker making $30,000 a year would be $114 for a high school drop-out, $96 for a high school graduate, $72 for an individual with some college and $24 for a college graduate.

Sure, that may not sound like an incredible amount of money, but what if we increased the share of college educated individuals in the Twin Cities area by 5 percent? Or, as Growth and Justice has suggested, 25 percent over the next 10 years?

That's a lot of money.

Moreover, for Minnesotan businesses, more money means more disposable income, which, at least theoretically, means more discretionary spending on goods and services to fuel the local economy. The extent of the local economic impact, of course, assumes that wages can rise faster than inflation, and that the beneficiaries of higher wages spend their money in Minnesota... or even better, on Minnesota-made products.

Moretti's isn't the only model, and may even overestimate the increase in wages due to the external effects of post-secondary education density in the population. However, most researchers seem to agree that at the very least, a higher proportion of post-secondary degree attainment in the population still correlates with higher wages for those who have earned the degrees, a marked reduction in crime rates and the development of a workforce that is more suited to the skilled jobs of the 21st century-all of which benefit the state and local economy.6

It may be difficult to quantify the exact local economic benefit of higher education, but it doesn't take an economist to realize that when people make more money, they spend more money. Spending money, in turn, supports local businesses, allowing them to hire more employees, creating more jobs.

In the end, as we think about ways to build up Minnesota's economy coming out of this economic downturn, we should think about the ways that post-secondary education provides social benefits. Ultimately, an investment in higher education is an investment in jobs and the economy, not a drain on public resources providing benefits only to the few.

1 Holzer, H. J. & Lerman, R. I. (2009). The Future of Middle-Skill Jobs. Washington D.C.: Brookings.

2  Lucas, R. E. (1988). On the Mechanics of Economic Development. Journal of Monetary Economics, 22, 3-42.

3 Krueger, A.B. & Lindahl, M., 1998. Education for Growth in Sweden and the World. Industrial Relation Section
Working Paper, Princeton.

4 Friedman, M. (1962). Capitalism and Freedom. Chicago: University of Chicago Press.; Dee, T. S. (2003). Are There Civic Returns to Education? NBER Working Paper No. 9588.

5 Moretti, E. (2004). Estimating the Social Return to Higher Education: Evidence from Longitudinal and Repeated Cross-Sectional Data. Journal of Econometrics, 121, 175-212.

6 Holzer & Lerman, 2009; Lange, F. & Topel, R. (2006). The Social Value of Education and Human Capital. Handbook f Economics and Education, 459-509.

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