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Education and Country Income

One of the biggest challenges facing the world today is the disparity in the quality of life between countries around the world. Economists use income per capita (the average income per person) as a good measure to compare quality of life across nations. Not surprisingly, higher per capita income directly correlates with a higher quality of life.

While there are many important factors that explain the variation in per capita income, one important element is the average level of education in a country.  More educated nations have higher levels of per capita income. The table below reports average levels of education and per capita incomes in some countries.  For example, average education in Morocco is 4.2 years and per capita income there is only $3,000.   Average education in Turkey is 6.6 years, and per capita income is $10,900. In comparison, average education in Italy is 9.5 years and per capita income is $33,000.  Average education in the U.S. is 13.4 years, and per capita income in the U.S. is $53,000.  Clearly, we can see that there is a relationship between higher levels of education and higher levels of income.

Post2_Table1Using all countries around the world with available data, the graph below plots each country’s average years of education against its per capita income.  The positive relationship is evident.  Countries with low levels of education are poorer; more educated countries have higher per capita incomes.  While this graph is not evidence that higher levels of education cause higher levels of income, it is evidence that they are closely related to each other.


Of course, it is more interesting to consider if increasing the level of education alone also increases per capita income. Yet, to determine the true impact of education on income, one needs to account for two potentially confounding forces.  First, as a country develops economically it can spend additional resources on the education system, which could increase the level of education in that country.  This means that the income level of a country may influence the extent of education in the country, rather than education impacting income. In other words, higher income could be causing higher levels of education instead of the other way around.

Second, it is possible that some factors might impact both the level of education in a country and the level of economic development of the country.  For example, some countries may have strong cultural traditions that motivate their citizens to be more educated. These traditions may also have an impact on creativity and innovation, which would lead to greater economic prosperity. In this case, these cultural factors would be the driving force behind both education and country income, making it hard to measure the effect that education alone has on income.

After adjusting for these factors using sophisticated methods, economists demonstrated that an increase in country education does in fact have a direct positive effect on country income.  Schooling differences between countries are responsible for a substantial part of the difference in incomes between countries.  In other words, per capita income of a country will be higher in comparison to another similar country if the working-age population of the first country is more educated.

In addition, the difference in the quality of education also explains cross-country income differences.  If the working-age populations of two countries have the same average education, but if the quality of education in the first country is greater than the quality of education in the second country, per capita income in the first country will be higher.

All this means is that when people in a country are more educated and better educated, this enhanced level of education has a direct, causal impact on per capita income in the country.

 (Continued in the next post)