 Ask
Dr. Econ
February 2004
What is the importance of developing job skills?
This is an excellent question. Simply put, it is very important to develop
job skills. No skills equal few jobs; few job opportunities equal lower
earnings, etc. One obvious way to obtain skills in an environment of
rapid technological change and increased global competition is to get
an education: "Innovations in the workplace are changing the demand
for the types of
skills needed on the job, which in part explains the differential effects
on workers. For example, evidence tells us that the returns from
investments in higher education for workers in the U.S. have risen."
(San
Francisco Federal Reserve 2003
Annual Report). A recent FRBSF Economic
Letter by Valletta
and MacDonald (2004) found, “…that workers who use computers
earn
more than otherwise similar workers who do not. We also find that
this effect has been especially large for highly educated workers in
recent years.”
Value of an education
So what’s the value of an education? As is illustrated in Chart
1 annual earnings increased dramatically as the level of education rose;
and those differences widened noticeably from 1997 to 2001. Let’s
compare median wages in 2001. Individuals with a high school diploma
earned a median income of $36,055, those with a bachelor’s degree
earned a median income of $72,284, whereas individuals with a graduate
degree earned $105,320.
Chart 1
Is the cost of an education really worth it?
In 2004 college tuition is on the rise and state budgets across the country
have made drastic cuts to funding for higher education. Compare the rising
costs of an education with the opportunity cost, i.e. the amount of money
a student could have made had they entered the workforce immediately
after high school, and many high school students may be left wondering
if an education is really worth the time and effort. To provide perspective
on college education costs, here is one simple comparison using Census
Bureau data to compare the disparities between educational levels and
lifetime earnings:
- High school grads will earn $1.2 million
- Bachelor degree holders will earn $2.1 million, and
- Professional degree holders will earn $2.9 million.
Note: Example does not account for the time value
of money.
To remain skilled, education must remain dynamic
According to a recent report (Cantu, Rene, “What
is the Value of an Education,” Texas Labor Market Review,
12/2003); our society is better educated than ever before. Eighty-four
percent
of adults 25 years or older completed high school. Twenty-six percent
hold bachelors degrees. Compare these levels of education to those 30
years ago, when only 63 percent of adults had a high school diploma and
only 14 percent obtained bachelors degrees. The difference is dramatic.
However,
even as our society becomes more educated, some workers are seeing their
industries phased out and their skills left behind. The only way to
stay ahead of this trend is for workers to continue to educate themselves.
In Chairman Greenspan’s testimony
before the House of Representatives in March of 2004, he states….
But for the past twenty years the real incomes of skilled,
especially highly skilled, workers have risen more than the average
of all workers,
whereas real wage rate increases for lesser-skilled workers have
been below average, indeed virtually nonexistent. This difference in
wage
trends suggests that, at least in relative terms, we have developed
a shortage of highly skilled workers and a surplus of lesser-skilled
workers.
The workplace is more competitive then ever and changes on a seemingly
daily basis. In the May 21, 2004 FRBSF
Economic Letter, “Globalization,
Threat or Opportunity for the U.S. Economy,” former San Francisco
Reserve Bank President Robert T. Parry writes: ”The demand for
highly skilled workers continue to outweigh the supply and with the
growing trend to out source work, the workforce has been left with
many once skilled workers unskilled in a fast changing economy.” To
adjust to this rapidly changing environment more and more workers are
choosing to return to school to upgrade or improve their skills and
earning capacity. Concluding his Economic Letter, President
Parry notes:
…Education is the bedrock of America’s edge in technology
and productivity. It’s the key to producing workers with the
flexibility to learn new skills as market conditions evolve.
Additionally, in the July
23, 2004 FRBSF Economic Letter, Valletta and MacDonald
state:
“Our findings confirm that workers who use computers earn more
than otherwise similar workers who do not. We also find that this
effect has been especially large for highly educated workers in recent
years.”
In summary, although the workforce faces a continually changing environment
and college is becoming increasingly expensive, the long-term benefits
of an education still outweigh the short term costs.
References
Federal Reserve Bank of San Francisco, 2003
Annual Report.
“Globalization:
Threat or Opportunity for the U.S. Economy,” Robert T.
Parry. FRBSF Economic Letter 2004-12, May 21, 2004.
Testimony
of Chairman Alan Greenspan before the Committee on Education and
the Workforce, U.S. House of Representatives March 11, 2004.
"The
Computer Evolution," Rob Valletta and Geoffrey MacDonald, FRBSF
Economic Letter 2004-19; July 23, 2004.
U.S. Census Bureau: Money Income of People, September,
2002 Available as: HTML or PDF
"What
is the Value of an Education?" Rene
Cantu. Texas Labor Market Review, December 2003.
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