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Investing in human capital

When you teach somebody, they and society both benefit. What's in it for you?

Key points

  • Almost universally, economists agree that it is a good individual decision to invest time and money into education.
  • Society also benefits from education—better health outcomes for the population; lower levels of crime; a cleaner environment; and a more stable, democratic government are positive externalities of investment in education.
  • Private rates of return go primarily to an individual; for example, earning interest on a savings account.
  • Social rates of return go primarily to society; for example, providing free education.

Why invest in human capital?

Investment in anything—whether it is the construction of a new power plant or research in a new cancer treatment—usually requires a certain upfront cost with an uncertain future benefit. The investment in education, or human capital, is no different.

Private benefits of education

Think of a student. Over the span of many years, she and her family invest significant amounts of time and money into her education. Their hope is that higher levels of educational attainment will eventually serve to increase the student’s future productivity and subsequent ability to earn. Once the numbers are crunched, does this investment pay off for the student?
Almost universally, economists have found that the answer to this question is a clear yes. For example, several studies of the return to education in the United States estimate that the rate of return to a college education is approximately 10%. The table below—showing data from the US Bureau of Labor Statistics’ Usual Weekly Earnings of Wage and Salary Workers, Third Quarter 2014—demonstrates that median weekly earnings are higher for workers who have completed more education. While these rates of return will beat equivalent investments in Treasury bonds or savings accounts, the estimated returns to education go primarily to the individual worker, so these returns are private rates of return to education.
Usual weekly earnings of wage and salary workers, third quarter 2014
Less than a high school degreeHigh school degree, no collegeBachelor’s degree
Median weekly earnings, full-time workers over the age of 25$488$668$1,101

Social benefits of education

But what does society gain from investing in the education of a student? After all, if the government is spending taxpayer dollars to subsidize public education, society should expect some kind of return on that spending. Again, economists have found that, across a variety of nations, the social rate of return on schooling is also positive.
Positive externalities exist from investment in education. These positive externalities are not always easy to measure, but according to Walter McMahon, the positive externalities to education typically include better health outcomes for the population, lower levels of crime, a cleaner environment, and a more stable, democratic government. For these reasons, many nations have chosen to use taxpayer dollars to subsidize primary, secondary, and higher education.
Education clearly benefits the person who receives it, but a society where most people have a good level of education provides positive externalities for all.

Want to join the conversation?

  • primosaur ultimate style avatar for user Stormcrusher
    In the second key point, it says that if more people are educated there are "better health outcomes." I Don't understand how that works. Can someone help?
    (6 votes)
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    • aqualine ultimate style avatar for user Ben McCuskey
      One possible explanation could be that if you have a higher level of education you may be better able to determine practices and behaviors that result in a healthier lifestyle. Furthermore, a higher level of education may provide a higher paying job resulting in more disposable income and therefore more money available for better health care, an adequate amount and more nutritional types of food, the free time to engage in healthy activities, etc. I don't know this for sure, but it seems like a logical deduction.
      (16 votes)
  • hopper jumping style avatar for user a dude
    Will providing free education make our society better? Won't it just mess it up?
    (3 votes)
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    • blobby green style avatar for user Devon Wade Little
      Education, while having large benefits for those who attain it, can cease to retain its worth in a society that hands it out for free. Any benefit from education can only be measured in those who have obtained employment after receiving it. When politicians or misguided economists speak of these "social benefits of education", they fail to realize that education doesn't create the jobs that these educated individuals seek to fill; it simply provides them further enrichment and skill in these positions. Handing an education out for free creates a situation where it no longer provides a competitive advantage for those who have obtained it, nullifying any personal benefit it may have once had. For further research on this look into Soviet Russia. They provided free education but even the most educated were forced into mundane and often harmful jobs; many of them starved.
      (3 votes)
  • winston baby style avatar for user kenhim89
    whats the difference between graduating in college or highschool in School with diploma, and graduating in Khan academy by self paced? does people who mastered khan academy lessons could also apply for the jobs that they master here and also earn a minimum salary without a diploma and accepted by the big companies?
    (1 vote)
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  • winston baby style avatar for user kenhim89
    If they say education is the best investment. why each government on this planet not imposing a free tuition for each citizen? and they only have to pay the teachers for their work ? whats the pros and cons if they will do that?
    (0 votes)
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