Returns for investment in education still high

The average returns for investment in education have remained high in Finland. A prolonged education is still a good investment for an individual in terms of employability and income level. However, the personal returns for third-level graduates are not as good as previously. This is probably because the proportion of those with graduate level education has grown rapidly among young employees, especially women. The growth in investment in education has a significant effect on the national economy. A high level of education among the labour force facilitates the implementation of new technologies and adaptation to organisational changes.

A recent report by the Research Institute of the Finnish Economy (Elinkeinoelämän Tutkimuslaitos, ETLA) investigates the returns of education at individual level, as well as at company and national levels. On the basis of research literature, the study reviews the impact of investment in education on productivity, economic growth and income distribution. The returns for an individual are analysed against Labour Force Survey data from 1998 to 2002.

The study was funded by the Finnish National Fund for Research and Development (Suomen itsenäisyyden juhlarahasto, Sitra).

Education facilitates implementation of new technologies

Education has a significant direct and indirect impact on economic growth. At an individual level, greater education has a clear positive effect on income. It seems that the growth in investment in education has at least as significant an effect on the national economy, if not even more so.

The more a national economy adopts leading technologies, the more crucial the quality of education is. A high level of education among the labour force facilitates the implementation of new technologies and adaptation to organisational changes.

At company level, productivity increases through the implementation of new technologies, especially new information technologies (IT), and through a high level of education among its employees. Education provides workers with certain abilities – like the ability to ‘learn to learn’ – that are important when new production methods and operations models are implemented. Employees who are highly educated also plan and build production systems as well as develop products and services in the organisation; their impact improves the overall technological performance of the organisation.

Rapid increase in educational level

The educational level of Finnish wage and salary earners has risen rapidly over the past decades, especially among women (see figure below). Today, female workers have a clearly higher level of education, on average, than their male colleagues do.

Finnish wage and salary earners, by sex and educational level

Note: Data from 2003 according to revised classification of education

Source: Quality of Work Life Surveys, 1977–2003

However, at the same time, the returns for third-level graduates have declined when measured by gross income as well as by additional yield from a new qualification. In accordance with the law of supply and demand, the cost of young employees educated to graduate level has fallen as their proportion in the labour force has increased. Nevertheless, returns of low tertiary (vocational) education have grown significantly among employees aged under 35 years.

The situation for those with a basic education has weakened over time. In general, the additional yield from upper secondary education is small compared to basic education. However, in relative terms, young employees with a basic educational level benefit most if they achieve an upper secondary level qualification. This decreases their risk of unemployment and marginalisation.

Greater returns for men than for women

An analysis by sex reveals that the income premium is lower for women than for men at all levels of education: in other words, the same duration of education provides greater returns for men than for women. Compared over time, the returns for women in part-time employment in particular have deteriorated.

The table shows the differences in yield and gross income for men and women in terms of their respective levels of education, compared to those with only a lower secondary or basic education. The direction of the trend over time is also shown.

Differences in additional yield and income, by level of education, compared to basic level education, for wage and salary earners, by sex, 2001
Differences in additional yield and income, by level of education, compared to basic level education, for wage and salary earners, by sex, 2001

Additional yield compared to basic education	Income premium from a qualification				Difference in average income
	Women		Men		Women		Men
	2001	Trend	2001	Trend	2001	Trend	2001	Trend
Upper secondary qualification	5%	~	8%	↓	1%	~	2%	~
Lowest tertiary education	26%	↑	32%	↑	22%	↑	29%	↑
Undergraduate level	40%	↓	67%	↑	32%	~	56%	~
Graduate level	84%	~	88%	↓	71%	~	76%	~

Note: ↑ = increasing ↓= decreasing ~ = no change

Source: Asplund and Maliranta, 2006

Commentary

Formal training is a crucial factor influencing income at an individual level as well as income distribution differences in the labour market in general. However, these effects vary in strength depending on educational level and changes over time. Furthermore, many other factors contribute to income differences besides educational level. These factors can be related directly to the individual – like age or sex – or to characteristics of the job; sector and field of education are also significant elements in determining income levels.

Overall, the returns of education have remained relatively similar in Finland over the past 10 years. By international standards, these returns are relatively high.

References and further information

Asplund, R. and Maliranta, M., Koulutuksen taloudelliset vaikutukset [Economic impact of education], Sitra Reports 60, Sitra, 2006.

Lehto A.-M. and Sutela, H., Threats and opportunities. Findings of Finnish Quality of Work Life Surveys 1977–2003, Statistics Finland, 2005.

See also the topic report Impact of training on people’s employability (TN0506TR01).

Hanna Sutela, Statistics Finland