Children's Education Is a Smart Investment
Early childhood development may seem like an odd topic for a Federal Reserve Bank president. But as a regional Reserve Bank in a federated central banking system like the Fed, we spend a good deal of time trying to understand the economies that make up our district, which includes Maryland, D.C., Virginia, West Virginia and the Carolinas.</br></br>Data on the growth of income per person across the United States and across cities and metropolitan areas reveal that at least one important measure of skills is consistently correlated with future growth. That measure is education, and a typical finding is that the share of the population of a U.S. city or state that had a college degree in 1990 was positively associated with growth in family income between 1990 and 2000. In other words, the more educated the population, the greater the subsequent growth in economic well-being. Furthermore, population growth is correlated with education levels, suggesting that places with highly skilled populations create opportunities that attract newcomers.</br></br>What is striking about the empirical evidence is that higher skill levels predict faster growth, all else equal. One possible interpretation of this fact is that skills, in addition to boosting current income, enhance an area's ability to further build its skill base: "Human capital begets more human capital," you might say. Economists have identified two distinct ways this might come about. One is the straightforward notion that certain general skills make people better at learning new skills. Another involves what economists call "externalities" or "increasing returns," meaning that a skilled worker is more productive in a marketplace or work environment with other skilled workers.</br></br>The idea that human capital promotes growth is, perhaps, not too surprising. After all, and as I mentioned, it's quite natural to think of differences in skills as explaining a substantial part of the differences in income between individuals -- why shouldn't this logic extend to communities, cities, states and so on? At the level of individual workers, in fact, there is abundant evidence that the importance of skill to one's economic well-being has grown over the last several decades. This is seen in a growing gap between the average wages earned by high school graduates and those with college or advanced degrees.</br></br>The growth in this pay differential, or "skill premium," is a major factor behind the increase in income inequality that has received so much attention of late. The apparent reasons for this widening dispersion are germane here. Wages paid to workers at any particular skill level generally reflect the productivity of those workers -- how much economic value their work creates. If the wages of higher-skilled workers have grown more rapidly than the wages of the less-skilled, it must be that the work environment has changed in a way that has made the productivity of higher-skilled workers rise more rapidly.