Economic spillover: Return on investment in higher education benefits individuals, society

By Martin Shields, contributing writer

Writing in Competitive Edge that a college education significantly increases an individual's income is like telling NASA the sun rises in the east. Yet the broader impacts of higher education in Colorado are still only murkily understood. I hope to provide some clarity.

According to the Census Bureau, earnings for Colorado's full-time workers with a "bachelor's degree only" averaged $67,700 in 2006. This is about 95 percent higher than full-time workers with a "high school degree only," who earned about $34,700 on average.

And this gap is growing. In 1980, U.S. workers with a four-year college degree made about 60 percent more than those with only a high school degree.

Educational spillover

While higher education clearly increases individual income, its impacts are much more pervasive. An obvious example is university-based research and development that leads to new business spin-offs as new technologies are brought to the marketplace.

One area less understood is the social return to higher education investment. In a fascinating paper, University of California-Berkeley economist Enrico Moretti quantifies the extent to which society's benefits to a college education exceed private returns. Economists refer to such a phenomenon as an "educational spillover."

Professor Moretti does so by looking at how individual wages differ across cities according to differences in the overall share of college graduates in the local labor force. After accounting for individual differences, he finds that a one percentage-point increase in the supply of college graduates raises high school drop-outs' wages by 1.9 percent, high school graduates' wages by 1.6 percent, and college graduates wages by 0.4 percent.

Colorado benefits

To illustrate the impact, we can apply Moretti's findings to Denver, which witnessed a 3.7 percent increase in the proportion of college graduates between 2000 and 2006. His results suggest that the city's external return to education may have accounted for wage increases among high school graduates and college graduates of 5.9 percent and 1.5 percent, respectively, over the six-year period.

Applying Colorado wage averages, this means that the 2006 wages for high-school-degreed workers in Denver are about $1,900 higher per year than they would have been had the city's share of college workers in the labor force remained unchanged over this time frame.

While Moretti's paper is fairly complicated, the intuition and policy implications are straightforward. By increasing innovation capacity, growth in the region's college-educated workforce "spills over" to other sectors, increasing the productivity of all workers.

As productivity rises, wages increase for workers of all education levels. Thus, the benefits of individual higher education extend across society. Policymakers need to take these broader impacts into account when determining higher education investments.

Martin Shields is a regional economist and an associate professor of economics at Colorado State University.