Ben S Bernanke: Education and economic competitiveness
Remarks by Mr Ben S Bernanke, Chairman of the Board of Governors of the US Federal
Reserve System, at the US Chamber Education and Workforce Summit, Washington DC,
24 September 2007.
The original speech, which contains various links to the documents mentioned, can be found on the US Federal
Reserve System's website.
* * *
When I travel around the country, meeting with students, business people, and others
interested in the economy, I am occasionally asked for investment advice. Usually (though
not always) the question is posed in jest. No one really expects me to tell them which three
stocks they should buy. However, I know the answer to the question and I will share it with
you today: Education is the best investment.
Here at the U.S. Chamber Education and Workforce Summit, I don't really need to convince
you that, as an investment, education provides excellent returns, both for individuals and for
society. As executives accustomed to making hard cost-benefit decisions, you doubtless
assign a high priority to the quality of your business's workforce because you know that a key
- perhaps the key - to your success is the capabilities of the people you employ. To a
significant extent, those capabilities are the product of education. Here I am speaking not just
of education acquired formally in classrooms before entering the workforce but also of
lifelong learning that, yes, includes the formal classroom training that might first come to
mind but that also includes early childhood programs, informal mentoring on the job, and
mid-career retraining, to name a few examples. And when I speak of capabilities, I mean not
only the knowledge derived from education but also the values, skills, and personal traits
acquired through education, which are as important as, and sometimes even more important
than, the specific knowledge obtained. These include such qualities as the ability to think
critically, to communicate clearly and logically, and to see a project through from start to
finish.
Today, I would like to offer a broad overview of education and its importance to our economy
from my perspective not only as an economist but also as a one-time school board member,
the spouse of a teacher, and the parent of two young adults pursuing higher education.
Although the United States has long been a world leader in expanding educational
opportunities, we have also long grappled with challenges, such as troubling high-school
dropout rates, particularly for minority and immigrant youths, and frustratingly slow and
uneven progress in raising test scores and other measures of educational achievement. If we
are to make progress in meeting these challenges, we must be willing to actively debate their
causes and continually experiment and innovate to find solutions.
The benefits of education
Education imparts significant benefits both to our society and the individuals who pursue it.
Economists have long recognized that the skills of the workforce are an important source of
economic growth. Moreover, as the increase over time in the returns to education and skill is
likely the single greatest cause of the long-term rise in economic inequality, policies that lead
to broad investments in education and training can help reduce inequality while expanding
economic opportunity (Bernanke, 2007). But the benefits of education are more than
economic. A substantial body of evidence demonstrates that more-highly-educated
individuals are happier on average, make better personal financial decisions, suffer fewer
spells of unemployment, and enjoy better health. Benefiting society as a whole, educated
individuals are more likely to participate in civic affairs, volunteer their time to charities, and
subscribe to personal values - such as tolerance and an appreciation of cultural differences
- that are increasingly crucial for the healthy functioning of our diverse society (Glaeser,
Ponzetto, and Shleifer, 2006; Dee, 2004).
From a macroeconomic standpoint, education is important because it is so directly linked to
productivity, which, in turn, is the critical determinant of the overall standard of living. The
Bureau of Labor Statistics estimates that, between 1987 and 2006, ongoing improvement in
the education and experience of the U.S. workforce contributed 0.4 percentage point per
year to the increase in nonfarm business labor productivity (U.S. Department of Labor,
2007), a significant amount. These estimates are however conservative in that they hold
fixed other sources of productivity growth, such as the accumulation of various forms of
capital and the advance of technology; but workers' skills certainly contribute indirectly to
productivity growth by affecting these other factors as well. For example, the state of
technology is affected both by the creativity and knowledge of scientists and engineers
engaged in formal research and development as well as by the efforts of skilled workers on
the shop floor who find more efficient ways to accomplish a given task. Managers who
develop a new business plan or find new ways to use evolving technologies can also be
thought of as adding to the "intangible," or knowledge-based, capital of the firm, which by
some estimates is comparable in importance to physical capital such as factories and
equipment (Corrado, Hulten, and Sichel, 2006).
For individuals, the economic returns to education are substantial as well. In 2006, the
median weekly earnings of college graduates were 75 percent higher than the earnings of
high-school graduates. In turn, workers with a high-school degree earned 42 percent more
than those without any diploma.1 These differentials are large and have been growing;
indeed, they have roughly doubled in the past twenty-five years or so. The source of the
widening wage gap between the more-educated and less-educated is nothing more
complicated than supply and demand. The demand for more-educated workers has been
increasing rapidly, partly because the much more widespread use of computers and other
sophisticated information and communication technologies in the workplace has increased
the reward for technical skills. The supply of highly educated workers has also risen. At the
start of the 1980s, 22 percent of young adults aged 25 to 29 held a college degree or more;
by last year, that fraction had moved up to 28.5 percent.2 Nevertheless, the supply of
educated workers has not kept pace with demand, thus generating an increased salary
premium for education. Because the wages of those at the top of the educational ladder have
increased the fastest, increasing our investment in education can benefit not only individuals
and society but also might narrow income gaps.
Education and the challenges facing America today
The educational challenges our society faces should be considered in the context of three
broad trends: the retirement of the baby-boom generation, the inexorable advance of the
technological frontier, and the ongoing globalization of economic activity.
As the baby boomers, now ranging in age from their late 40s to early 60s, leave the
workforce, their places will be taken by the smaller cohort of workers born in the mid-to-late
1960s and early 1970s. As a result, the U.S. workforce - as a matter of simple arithmetic -
will increase more slowly and is likely to become less experienced on average (Jorgenson
and others, 2007; Aaronson and Sullivan, 2002). In a broader sense, the ratio of working
people to retirees will decline, meaning that those still working will, in effect, be supporting
relatively more non-working people. This year, there are about five working-age people (20-
64) for every person aged 65 and older; by 2030, the ratio will be about 3-to-1 (Bernanke,
2006). The slower expansion of the labor force, all else equal, implies slower growth of
potential output. More schooling for more of the workforce could help cushion the impact of
this demographic transition on economic growth by boosting productivity growth.
Continuing advances in technology also put a premium on education. Which jobs will be
most affected by technology is difficult to predict, although some research suggests that
sectors that now use information technology (IT) relatively less intensively, such as
healthcare and other service sectors, are likely to step up their use of software and IT services
(Mann, 2003). Regardless, better-educated workers are likely better prepared to adapt to
new technologies as they develop (Doms, Dunne, and Troske, 1997).
Ongoing globalization of economic activity will also lead to continuing changes in the
structure of the U.S. economy - including the composition of our output of both goods and
services, and thus the structure of our labor force. The world economy is benefiting from the
expansion of trade and the rising productivity of countries abroad that are making great
strides expanding both their infrastructure and the educational attainment of their workforces.
That can be good for them, and for us. Importantly, our ability to reap the benefits of
globalization will depend on the flexibility of our labor force to adapt to changes in job
opportunities, in part by investing in the education and training necessary to meet the new
demands (Bernanke, 2004).
Educational attainment and achievement: where do we stand?
The United States has a long tradition of recognizing the significant social and economic
benefits of providing high-quality education for as many of its citizens as possible. The United
States led the world, first, in expanding access to high-school education and, then, in the
post-World War II era, access to college (Goldin, 2001; Goldin and Katz, 1999). By 1966,
about half of the workforce aged 25 and older had completed high school and about 10
percent had completed college. By 2006, more than 90 percent of adults in the labor force
had a high-school education and more than 20 percent held at least a bachelor's degree.
However, most of the progress over the past forty years occurred in the 1970s and early
1980s. Since then, for example, the high-school graduation rate for 25-to-29-year-olds has
not increased, and the college completion rate has risen only modestly (U.S. Department of
Education, 2007b).
One trend is particularly disappointing: Both high-school and college completion rates for
minorities continue to lag.3 Over the past ten years, the high-school completion rate for
whites aged 25 to 29 hovered above 93 percent, while the rate for blacks of the same age
stayed near 87 percent; the rate for Hispanics, though trending up over the period, was only
63 percent last year. The gaps in college completion are wider. In recent years, more than
one-third of whites aged 25 to 29 had at least a bachelor's degree, compared with less than
one-fifth of same-aged blacks and around 10 percent of Hispanics.
Assessing where we stand in terms of educational achievement (how much students learn) is
fraught with considerably greater difficulties than assessing attainment (how far students
progress in their schooling). And, the results of various metrics highlight both discouraging
and encouraging elements. The Department of Education's National Assessment of
Educational Progress shows the average reading levels of our high-school seniors have
stagnated in recent years; however, our fourth graders continue to improve in reading, and
both fourth and eighth graders have improved in math (U.S. Department of Education,
National Center for Education Statistics, 2007b). At the same time, some initial results from
the adoption of state accountability standards suggest that they have had a positive effect on
students' test-score gains (Jacob, 2005; Hanushek and Raymond, 2004). International
comparisons of student achievement are even more difficult and present a mixed picture.4
Compared with students around the world, U.S. students still perform relatively well in
reading and, in the lower grades, at math and science. Older U.S. students, however, show
less ability to apply math and science skills than their peers in other industrialized countries.
Lifelong learning can help us meet economic challenges
In the past, the U.S. education system has responded to the needs of a changing economy,
and I believe that as we address such challenges as the retirement of the baby-boom
generation, advancing technology, and globalization, our education system will again make
an important contribution to the adjustment process. That means, of course, that we will have
to grapple with difficult issues - how to boost educational attainment, particularly for
minorities and immigrant youths; how to make more consistent and noticeable progress in
raising academic achievement; and how to ensure that older workers have meaningful
opportunities to refresh their skills.
What can be done so that our educational system will continue to play a significant role in
supporting economic change? In broad terms, we must begin by recognizing that learning is
a lifelong process and that we have opportunities to improve education at every point along
the way. Many of these opportunities lie outside the traditional route of a
kindergartenthrough-twelfth-grade education followed by four years of college. I'd like to comment briefly
on what economists have found about the benefits of educational investments at different
points in the life cycle.
Early childhood education
Building the foundation for lifelong learning from the earliest ages is crucial (Heckman,
Stixrud, and Urzua, 2006). Research suggests that the home environment is especially
important and that children who start behind find catching up increasingly difficult (Heckman
and Masterov, 2007). Thus, the payoff from high-quality pre-school and home visitation
programs is likely very high, especially for children born into poor or otherwise disadvantaged
families. Recent research - some sponsored by the Federal Reserve Bank of Minneapolis in
collaboration with the University of Minnesota - has documented high returns from early
childhood programs in terms of subsequent educational attainment and in lower rates of
social problems, such as crime, teenage pregnancy, and welfare dependency (Burr and
Grunewald, 2006).5 But early childhood education is only the beginning. Positive results from
programs such as Head Start dissipate without further high-quality schooling at the
elementary and secondary levels (Garces, Thomas, and Currie, 2002).
Elementary and secondary schooling
Deciding what and how to teach students from kindergarten through high school and then
evaluating our schools' effectiveness in preparing students for the workforce and a lifetime of
learning is a daunting task. I will make only a few observations on the goals we should keep
in mind as we explore ways to improve learning at the elementary and secondary levels.
First, we should encourage experimentation and innovation. By my reading, the research on
K-12 education has, to date, yielded no easy answers to the questions of how to raise
academic achievement and how to ensure that students finish high school well prepared to
move on to more advanced study. A wide range of approaches has been and is being
explored: smaller class size, school choice, charter school programs, accountability
standards, flexibility in teacher certification rules, better teacher pay, merit-based pay,
yearround schooling - the list is long and probably will get longer. The size and diversity of our
country, together with the fact that state and local policymakers retain significant discretion
over how to structure their educational systems, provides us a natural laboratory for
assessing the effectiveness of alternative educational strategies. I view the debate about
what works and what doesn't to be a crucial part of discovering cost-effective ways to
improve our educational system.
The business community has an obvious interest in how well our schools prepare students
for a future in the workforce and should actively participate in the debate. But we all have a
stake. Students at the elementary and secondary levels are being prepared not just for work
but for life. Such skills and acquired traits as critical and creative thinking, social ability,
persistence, and satisfaction in accomplishment make not only good employees but good
citizens as well. Exposure to the arts and culture and experience in serving the community
can help support the development of these broader, harder-to-measure skills, alongside
more readily measurable cognitive accomplishments in reading, math, and science.
Second, teacher quality is critical. Studies show that student performance depends on
putting high-quality teachers in the classroom and retaining them as long as possible
(Aaronson, Barrow, and Sander, 2007; Rivkin, Hanushek, and Kain, 2005; Rockoff, 2004).
Indeed, many initiatives focus on linking students, especially disadvantaged students, with
high-quality schools staffed by high-quality teachers. High-quality teachers instill in their
young students a desire to stay in school and seek more education later in life, and the
evidence suggests that the quality of teaching might have the biggest impact on lower-ability
students (Murnane and Steele, 2007; Clotfelter and others, 2006; Hanushek, Kain, and
Rivkin, 2004). Unfortunately, our most disadvantaged communities, the ones most troubled
by high dropout rates, have difficulty attracting and keeping qualified teachers.
We must instill a desire among students to stay in school and to seek more education and
training over their working lives. Our elementary and secondary schools must provide
students a strong foundation for a life of learning. Although a wide range of remedial
education programs exist, research suggests that they are more costly and less effective
than a solid, sustained course of study through high school. In particular, government training
programs for disadvantaged youth have a rather disappointing reputation, particularly those
that are less intensive and not well tied to labor market needs (Martin and Grubb, 2001;
Heckman, LaLonde, and Smith, 1999).
A number of possibilities for improving the education of disadvantaged students seem worth
exploring. For example, several experiments suggest that smaller schools and smaller
classes may help disadvantaged students (although the benefits of such programs for the
general student population remain controversial). Supplemental education, including
afterschool and mentoring programs such as Big Brothers Big Sisters, have been shown to boost
school attendance (Grossman and Tierney, 1998). Increasing school time - either through
longer school hours or summer school - also has found some support (Jacob and Lefgren,
2004).
Higher education
In many ways, higher education represents the strongest part of the U.S. educational
system, as demonstrated by the fact that students from all parts of the world come here to
study. Our institutions of higher learning are extraordinarily varied, ranging from large public
research universities to small liberal arts colleges to community colleges and vocational
schools.
The main business of our institutions of higher education is, of course, undergraduate
teaching. But unlike some countries, we do not separate research and undergraduate
education; our advanced, graduate-level research programs are housed in universities with
strong undergraduate programs. Thus, our colleges and universities are important sources of
research and development (National Science Foundation, 2007; Litan, Mitchell, and Reedy,
forthcoming). More than half our basic research - the foundation for breakthroughs that
create new industries - is conducted at universities. Additionally, higher education has
embraced the broader mission of translating research into new products and enterprises; our
colleges and universities account for 15 percent of applied research and development
(National Science Foundation, 2007). The innovations that begin on campuses are diffused
to businesses through patents, start-up companies, and consulting arrangements between
faculty and industry.
One great challenge in higher education lies in making sure our high-school graduates are
prepared for it and have access to it. With college enrollment rates having leveled off in
recent years, much debate surrounds how we can move more students into higher education
and keep them in school until they graduate. Researchers have demonstrated a strong
relationship between family income and college attendance. Since 1990, nearly 80 percent of
high-school completers from high-income families (the top 20 percent of income) have
enrolled in college the next fall. The proportion of those from low-income families who enroll
in college the following fall has been moving up gradually, but it remains much lower - just
over 50 percent.6 This discrepancy holds even for students classified as high achievers: A
longitudinal study of eighth graders in 1988 found that only 29 percent of those scoring in the
top fourth of the group in math - but who were from families with low social and economic
status - had completed a bachelor's degree or more by 2000, while three-fourths of those
from families with high social and economic status finished their undergraduate degrees
(Fox, Connelly, and Snyder, 2005).7 Surely, high tuition must be one barrier to attending and
completing college (Card, 2001; Kane, 1994), but it is not the only barrier (Dynarski, 2005).
Low-income students, in particular, are more likely to come from school and family
environments that do a poor job of preparing them for a successful transition to college
(Carneiro and Heckman, 2003). This suggests that supplemental programs to help
underprepared college students could improve eventual college completion rates; unfortunately,
the research on the benefits of such programs is mixed, which reinforces the need to
improve educational achievement in regular high school classes (Bettinger and Long, 2005;
Angrist, Lang, and Oreopoulos, 2006).
Community colleges have made a significant contribution to expanding educational
opportunities. Offering lower costs and more-flexible schedules, they now enroll almost
onehalf of U.S. undergraduates. Attendance at one of these institutions is associated with higher
wages, even if a degree is not completed. Evidence suggests that each year of credit at a
community college is worth almost as much, in terms of increased earnings potential, as a
year at a four-year college. The average student who entered, but did not complete,
community college earns 9 percent to 13 percent more than the average for students who
ended their education with high school. Those who completed a two-year associate degree
earn an even larger premium, 15 percent to 27 percent (Kane and Rouse, 1999). And the
earnings of graduates who started at two-year schools and transferred to four-year programs
ultimately match those who begin their post-high-school education at four-year institutions
(Gill and Leigh, 2003). Community colleges play a constructive role not only for
18-to-22year-olds but also for older adults, providing flexible programs for obtaining new skills,
specialized training contracted for by individual businesses, remedial education, and adult
enrichment.
Adult education
Today we are increasingly recognizing that education need not, indeed should not, stop at
the age of 22. Economists have long argued that on-the-job training and learning-by-doing
are significant components of the acquisition of human capital. Research shows that the
knowledge and experience gained over time through informal and formal learning on the job
appear to pay off for workers and accrues particularly rapidly early in their careers (Altonji
and Williams, 2005; Topel, 1991). An extensive survey of firm-sponsored training a number
of years ago found that 84 percent of employees received some kind of formal training while
working for their current employer, and 96 percent received some type of informal training
(Bureau of Labor Statistics, 1996). With the advance of technology and the need to attract
and retain skilled workers, I am certain that business-sponsored training will remain an
important component of the management toolkit.
Upgrading skills through continuing education and training outside the job is also important,
particularly in an environment in which workers can face displacement from international
competition or technological advance. Recognizing this possibility, many workers continue to
acquire formal education later in life than was once traditional. For example, almost one-fifth
of students at post-secondary institutions of all types are at least 35 years old (National
Center for Education Statistics, 2007a). And, for older workers looking to retool their skills,
classroom instruction has been shown to be effective. For example, classroom training for
displaced workers is estimated to boost future wages as much as for students of the usual
school age, although the overall return on investment for displaced workers is lower because
they have fewer remaining working years than do new entrants to the labor force (Jacobsen,
LaLonde, Sullivan, 2005). Similarly, studies of a number of welfare-to-work programs have
reported long-term gains for those who participated in intensive basic education and
vocational training (Dyke and others, 2006; Hotz, Imbens, Klerman, 2006). Such results
suggest that well-designed programs to assist workers who lose their jobs can contribute to
cushioning the effects of globalization and technological change.
Conclusion
Let me close by reiterating that education - lifelong education for everyone, from toddlers to
workers well advanced in their careers - is indeed an excellent investment for individuals and
society as a whole. Education fundamentally supports advances in productivity, upon which
our ability to generate continuing improvement in our standard of living depends. If we are to
successfully navigate such challenges as the retirement of the baby-boom generation,
advancing technology, and increasing globalization, we must work diligently to maintain the
quality of our educational system where it is strong and strive to improve it where it is not. In
particular, we must find ways to move more of our students, especially minorities and
students from disadvantaged backgrounds, into educational opportunities after high school.
To do that, we must continually experiment, innovate, and evaluate so that we can make
rational decisions about what works and what doesn't in education. Because the quality of
your workforces is so vital to the success of your businesses, you as business executives
must participate fully in this process, along with other stakeholders - students, parents,
teachers, and policymakers. I'm encouraged that you are devoting so much energy and
thought to this topic at this three-day conference.
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