Assessing the economic benefits of education: reconciling microeconomic and macroeconomic approaches

Education is a potentially important driver of economic growth. Quantifying its benefits is therefore of crucial policy importance. A vast empirical literature in both microeconomics and macroeconomics has emerged around this question and proposed different approaches to assessing the effect of education on productivity. Based on a set of papers selected in conjunction with the Department for Education, this report discusses the strengths and limitations of several approaches within the microeconomic and macroeconomic literatures. In light of this analysis, the report then reviews the DfE’s current appraisal of the economic benefits of education and provides a number of recommendations for improvement. Overall, it concludes that the macroeconomic approach in theory offers the potential to estimate the total benefits of education – via both private and social returns. However in practice, current data limitations mean that this approach may not produce an estimate of the true causal effect of education on economic growth; instead this approach is likely to produce an upper bound. A more promising avenue may be to use more robust microeconomic strategies to estimate the external benefits of education in terms of its impact on productivity at the firm, industry or regional level, and/or by estimating and aggregating the non-monetary private benefits of education (e.g. health) and the non-monetary external benefits of education (e.g. crime) in a similar way to the Department’s current strategy for wage returns. Such approaches have the advantage of retaining the intuitive appeal of the macro approach to estimating the link between education and growth, while relying on the more robust identification strategies common to the microeconomic approach.

This report was written for the Centre for the Analysis of Youth Transitions (CAYT). A repository of CAYT impact studies is hosted by Mentor-Adepis (Alcohol and Drug Education and Prevention Information Service).