Education: The best protection against an economic crisis

TUESDAY, JUNE 25, 2013

by Dirk Van Damme
Head of the Innovation and Measuring Progress division, Directorate for Education and Skills

The insight that education is valuable both to individuals and to countries is not new. Using continuously improving data and statistical tools, we have come to understand and appreciate the magnitude of education’s impact on employment, income, health and life opportunities in general. From a purely economic point of view, private returns on investment are well beyond 10% per year, and public returns are only slightly below that figure. Fears that increasing participation and greater numbers of graduates – resulting in ever-increasing numbers of highly qualified people in the work force – would result in some kind of inflation, in diminishing returns and burgeoning graduate unemployment could not be confirmed by the data.

When the financial crisis erupted in 2007-08, rapidly turning into a global economic recession and a fiscal crisis in the Euro-zone and other countries, it was very difficult to predict its impact on education. Data for the years 2008 and 2009 showed that in the first years of the crisis, the impact on education remained limited and was confined to countries in severe crisis, such as Ireland, Iceland and Greece. Education is generally protected from shocks to the economic system because of its intrinsic slow pace of change. Individuals and families did not drastically alter their patterns of participation in education; and in the first years of the crisis, governments used stimulus packages and deficit spending to try to soften the blow, leaving education budgets more or less untouched. But we know that things started to change dramatically from 2010 onwards, when unemployment – especially among youth – climbed steeply and governments turned into austerity mode.

Education at a Glance 2013, the OECD’s reference on education indicators and statistics, for the first time provides a comprehensive set of data covering the years 2010 and 2011. The data convey a consistent, but also somewhat surprising picture. A great deal of the economic and social hardship caused by the crisis fell chiefly on less-educated individuals. The unemployment gap between well-educated young people and those who left school early widened during the crisis. On average across OECD countries, 5% of those with a tertiary education were unemployed, against 13% of those without an upper secondary education. Between 2008 and 2011 the unemployment rate for the latter group increased by 4%, while it rose by only 1.5% among the highly educated. The earnings gap widened as well: the average difference in earnings between highly educated and low-educated individuals grew from 75 percentage points to 90 percentage points between 2008 and 2011.

The message is clear: it is a person’s education that determines whether he or she will be extremely or only moderately exposed to the economic and social risks in times of crisis. Those without a minimal level of education, and certainly those of them without a stable job, find themselves without any shelter from the storm. Meanwhile, the relative returns on higher education increase. Some might argue that this is largely due to structural changes in the labour market: highly educated people taking the jobs of the middle-educated individuals, who, in turn, drive low-educated workers into unemployment. The earnings data do not seem to confirm this hypothesis: if tertiary-educated individuals were to take medium-skilled jobs en masse, their relative wage premium would not have increased as much as it did. In addition, the wage premium increases with age, which suggests that the higher level of skills among tertiary-educated workers is compensated in their salaries. In times of crisis and tough competition in the labour market, employers would certainly not be willing to value skills as much as they seem to do if there was no good reason to.

In short, the value of education increases during an economic crisis. Those who lack education, stand to lose a lot; those who have invested in it, can still reap its benefits.