Monday, March 5, 2012

Want better productivity? Try better education

The American con man Bernie Cornfeld's sales pitch was, "Do you sincerely want to be rich?" That is, are you prepared to pay a price to be rich? The question for Australia's business people is, do you sincerely want to raise our productivity?

It seems just about all our senior business people have taken to preaching sermons about the need to improve our flagging rate of productivity improvement, but I'm not sure how sincere they are.

Why not? Because the specific changes they say they want sound like a child's wishlist for Santa: industrial relations "reform" to reduce their workers' bargaining power, and tax "reform" to reduce the amount of tax they pay.

If chief executives were more sincere in their thirst for higher productivity - as opposed to things the government could do to make their jobs easier - they might have asked what the empirical research tells us about which changes would do most to enhance our productivity.

Had they done that, they would have found the biggest gains come from adding to human capital - that is, to the education and training of the workforce.

The productivity debate has been so superficial and self-serving you could be forgiven for not knowing that. Among all the research, consider the findings of Professor Eric Hanushek, of the Hoover institution at Stanford University, and Professor Ludger Woessmann, of the University of Munich. Because human capital is hard to measure, economists commonly fall back on the "proxy" (stand-in) of the workforce's average number of years of schooling or higher education.

The researchers collected data for 50 countries over the 40 years to 2000. They found that each additional year of schooling raised a country's average annual rate of growth in gross domestic product per person by 0.37 percentage points.

That's a significant increase. And it's consistent with the findings of many other researchers.

But Hanushek and Woessmann wanted to find a more accurate measure of human capital than just level of educational attainment.

So they constructed for each country an index of their students' performance in maths and science tests, such as those conducted by the Organisation for Economic Co-operation and Development in its program for international student assessment (PISA). Using this measure not of years of schooling but of cognitive skills, they found countries with higher test scores experienced far higher rates of growth in income per person (the very thing productivity improvement increases).

They found that if one country's test-score performance was 0.5 standard deviations (don't ask) higher than another country's in the 1960s, the first country's annual rate of economic growth per person was, on average, a full percentage point higher than the second country's over the following 40 years.

They also found, once the effect of higher levels of cognitive skills was taken into account, the significance of levels of school attainment dwindled to nothing.

So, the authors deduce, a country benefits from asking its students to remain at school for longer only if the students are learning something as a consequence.

"Higher levels of cognitive skill appear to play a major role in explaining international differences in economic growth," they say.

But could there be other factors helping to explain a country's higher rate of growth? Different researchers have identified two other important factors: the security of the country's property rights and its openness to international trade.

When Hanushek and Woessmann took those two factors into account, the positive effect of cognitive skills on average annual economic growth was reduced to 0.63 percentage points per half a standard deviation of test scores.

"This is the best available estimate of the size of the impact of cognitive skills on economic growth," they say. "Our commonsense understanding of the importance of good schools can thus be documented quite precisely.

"A highly skilled workforce can raise economic growth by about two-thirds of a percentage point every year."

Clearly, the professed searchers after higher productivity ought to be taking a lot more interest in what's happening in our schools than they are. One question they could be asking is whether it's having a few "rocket scientists" at the very top of the skills distribution that spur economic growth or if it's "education for all" that's needed.

When the researchers estimated the importance, they found each to be separately important to economic growth.

"That is, both the performance of countries in ensuring that almost all students achieve at basic levels and their performance in producing high-achieving students seem to matter," they say.

Just why this should be so isn't hard to imagine. Even if a country is simply making use of new technologies developed elsewhere - as we do - the more workers who have at least basic skills, the easier it will be for them to make use of those new technologies.

On the other hand, some workers need a high level of skills so they can help adapt the new technologies to their countries' particular situation.

Of course, it's not just the broad community that benefits from the accretion of human capital. As Dr Ben Jensen, of the Grattan Institute, has pointed out, improving the effectiveness of teaching - which is what increases students' cognitive skills - has substantial benefits for the students themselves.

"Young people who stay in school and invest in further education can expect to earn an additional 8 to 10 per cent per year for each additional year of education they undertake," he says.

But while we're focusing on the acquisition of education as a means to raise our material standard of living, let's not forget that education is also an end in itself. It allows us to lead broader, more inquiring, more comprehending lives.