The worldwide boom in college education during past several decades has been as remarkable as it was unexpected. Many economists in the United States were claiming in the 1970s that college education was overrated, at least as far as its effects on earnings. Yet starting in the late 1970s, the number of American high school graduates who went on for higher education began to grow at a reasonably fast rate. Were these college students disappointed by the effects of their education on their subsequent earnings and other aspects of their life, or did the nay-saying economists just get it wrong?
The evidence is now crystal clear that in fact college education turned out to be an excellent investment for the vast majority of these students. Despite books like "The Overeducated Americans", published in the late 1970s, that argued that the earnings gains from a college education were in serious decline, the gains from attending and graduating college actually increased rapidly after 1980. A natural interpretation of the increased enrollments in college is that expectations of improvement in their earnings, health, and other determinants of welfare attracted large numbers of Americans into higher education.
Supporting evidence for this interpretation is that the same trends in earnings and enrollments took place in the rest of the world. The earnings gap between persons with university and high school education increased in the great majority of countries, more or less regardless of their level of economic development. And as in the United States, the higher benefits from college stimulated sizable increases in the fraction of high school graduates who went on for further education. For example, in the top half of countries as measured by per capita incomes, the average percent of 30-34 year olds with a higher education increased between 1970 and 2000 from about 12 percent to over 20 percent. Lower income countries had similar increases, although poorer nations have much smaller fractions of persons with higher education.
In the great majority of countries, women increased their propensity to go to college much more rapidly than men. This sharply reduced the gender gap in college education. In fact, more women than men are getting higher education in virtually all the rich countries, and also in many middle -income countries. In the United States, a little under 60 percent of younger college graduates are now women, whereas in 1970 men were far more likely than women to start and especially to finish college.
Higher returns to college are an important immediate cause of this boom in the number of persons going to college in countries all over the globe and at different stages of economic development, but why did returns to college increase so universally? The answer must relate to general causes that were widely applicable. One factor that immediately comes to mind is the sharp expansion during the past several decades in the amount of international trade, including a rapid growth in foreign direct investment (FDI). The classical theory of international trade implies that in poorer countries with cheap low skilled labor, a growth in trade of goods and services should increase the demand for goods using relatively much of the low skilled labor, and trade should lower the demand for goods using the relatively expensive skilled labor. Increased trade has the opposite effects in rich countries. As a result, increased trade should raise the earnings of skilled workers relative to other labor in richer countries, but lower the relative earnings of skilled workers in poorer countries. Yet the gap between the earnings of skilled and less skilled workers has tended to rise in poorer countries as well.
The growth in FDI helps explain this apparent contradiction to classical trade theory, for FDI tends to raise the demand for educated and other skilled workers in recipient countries. Educated and other skilled workers become more valuable in developing countries when they import capital from the technologically advanced nations.
The newer technologies that have been developed during past three decades, such as the computer and the Internet, biotech, the mapping of the genome and other advances in medicine, and cell phones and social networking, also increased the overall demand for educated persons. Since the United States is the most important innovator in the world, and has one of the most efficient economies, it has experienced a particularly rapid widening of the college earnings premium.
Under the right circumstances, these newer technologies flow from the rich innovating countries, such as the United States and Japan, to developing and other countries. Technologies may be embodied in internationally traded goods and services, or in capital transfers, or brought back by students who study in the innovating nations. Since the international transfer of technologies is expedited by having a larger number of well -educated persons, the transfer of technologies also raises the demand for persons with higher education.
Many articles have complained that the increased benefits from higher education have contributed to widening inequality, not only in the United States, but in many other countries as well, including major developing countries like China and India. The larger education earnings premiums certainly helped widen income inequality, but these larger premiums also raised the efficiency of investments in capital by raising rates of return on human capital.
Higher returns on capital obviously raise the efficiency of an economy. The challenge to public and private policies is to increase the number of persons who manage to go to and benefit from college, for that would reduce inequality while raising the number of persons who benefit from the higher returns to a college education. How to accomplish this is too large a topic to be considered in this discussion, but improving the preparation of disadvantaged children so that they can benefit more from schooling should probably have high priority. Also important would be to increase the quality of schools available to these children by raising the degree of competition among schools.