The Essential Guide to Yield on Education in India
You have to stay in school. You have to. You have to go to college. You have to get your degree. Because that’s the one thing people can’t take away from you is your education. And it is worth the investment — Michelle Obama, Former First Lady
Relevance of education yield
What is the worth of investing in education in 21st century? In the world of online education, massive online open courses (MOOCs), edtech apps, what is the unique need that a brick and mortar education fulfils? When the next generation looks up to dropouts like Steve Jobs, Bill Gates, Mark Zuckerberg, Dhirubhai Ambani, or Ritesh Agarwal as role models, how will they think about education’s worth?
In this article, First Crayon answers important questions about the return on education for your child, whether they are in kindergarten or college. Hopefully, this will guide your decisions about ‘where’ and ‘when’ rather than ‘if’ to put your hard-earned money in that vast ocean of education. And all of this, from an Indian-first perspective.
An international perspective
1 in every 4 global citizen today is of school going age ie. 5–19 years according to United Nations. It is a massive education opportunity and challenge. An OECD study found that men with degrees earn on average USD 186,000 more over their working lives. This “degree premium” exceeds USD 300,000 in countries such as Italy and the United States. While the average level of education is trending upwards globally, most OECD countries are still seeing rising earnings advantages for university graduates. This suggests that knowledge still conveys an important advantage in labour markets.
Education itself is a putting off, a postponement; we are told to work hard to get good results. Why? So we can get a good job. What is a good job? One that pays well. Oh. And that’s it? All this suffering, merely so that we can earn a lot of money, which, even if we manage it, will not solve our problems anyway? It’s a tragically limited idea of what life is all about.” — Tom Hodgkinson, British Writer
Alan B. Krueger, an economics professor at Princeton, says the evidence suggests that, up to a point, an additional year of schooling is likely to raise an individual’s earnings about 10%.
But education is not just about earning more, it is a pre-requisite for employment in many cases. The below statistic by US BLS shows that more years of education also leads to lower likelihood of unemployment.
Most of these studies have been done in developed western countries. Anecdotally, it is evident that an average Asian parent is a lot more obsessed with their child’s education as compared to their western counterparts. The million dollar question is that does this obsession have a root in rational economic analysis?
Return on education investment
Using a variety of techniques, several scholars have estimated the return on investment in education (table below). Most of these are variations of the same methodology: Tuition and related fees are inputs and earnings are output. Interestingly, the earlier studies showed an inverse relationship between higher education and returns. Please note that impact of no education is not estimated. But latest studies are more in line with Asian parents’ instinct that more years of education leads to a better ROI/yield (10–15% return as a graduate vs. 1–5% return for someone with few schooling years). This could be rationalized as average education levels have risen steadily in India. This leads to a larger pool of highly educated candidates in recent years. The economic incentive of having ‘some education’ has eroded away over the years.
India Human Development Survey (IHDS) survey covers 41,554 households and 215,754 individuals across India. Below graph from the survey highlights the age-earnings profiles of persons between age group of 10 and 60 by levels of education in India. Preliminary analysis of the data suggests that an additional year of schooling will increase the earnings by an average of 14%. Controlling for various other factors that might influence an individual’s earnings, the return attributable to education is ~10%.
We have created a self-help calculator for anyone to estimate their own or their child’s return on education here: https://goo.gl/rNTRqE
Key insights from calculation of education yield
We can draw several insights from the analysis thus far:
- There is a direct correlation between years of education and earnings of an individual
- More years of education are also a shield against unemployment ie. periods with no earnings
- Power of compounding leads to large absolute differences that collect cumulatively over the years. Put it another way, higher education leads to a more comfortable old age
- Return on education is a function of relative education level (against the pool of job seeking candidates). During the 70s and 80s, when the average Indian did not have access to quality education, high returns could be generated simply by completing primary education. Today, completing graduate education might not generate the same returns as the school goer of 70s and 80s
- As a corollary to insight #3 and #4 along with the increase in average education levels in India, an individual having little to no education is at a serious disadvantage. Candidates with lower education are seeing little to stagnant earning growth over their working life
Concluding thoughts
The return numbers are meant to support the insights and not become the central theme themselves. They present one side of the story. These numbers cannot take into account intangibles such as parental support, genes, cultural context, race, religion, location, self-actualization, ambition, perseverance, or luck among other things. But what is clearly says, without any hesitation, is that no education is not an option.
On the flipside, these insights are guides that are generally correct at aggregate levels ie. not true in every circumstance. If every parent followed this analysis without contextualising, India would not have its Tendulkars, Rahmans, or Ambanis.
Inspired by consulting 2 X 2s, we made one of our own. It requires you to answer two questions and in return, offers a path forward:
- How much will your parenting style conform to society?
- How unique do you consider your child’s abilities?
If we could help in providing some more answers, feel free to reach out to us.
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