The Connection Between Economics of Education and Standard of Living

Human As a source of capital, educational institutions serve as a key driver of economic development by providing a skilled workforce. At the same time, by contributing to human development, social well-being, and quality of life, education positively influences social development.

The economics of education is an interdisciplinary field that applies the theories and findings of economics to education, conducting comparative analyses of educational demand, financing, and various educational programs and policies; it examines the multidimensional relationships between economics and education. Since its earliest studies on the relationship between schooling and individuals’ positions in the labor market, the field of economics of education has rapidly expanded to encompass nearly all areas related to education. Human capital, labor market analysis, employment policy, determinants of earnings, and income distribution are among the core topics studied in the economics of education.

The dominant model of educational demand is based on human capital theory. Human capital occupies a position that yields greater returns than most forms of physical capital. Individuals acquiring skills and knowledge through education are viewed as making an investment that promises future benefits in the form of higher earnings or the development of cultural capital. Because skilled workers are in demand both for understanding complex processes and for operating machinery, increases in human capital can keep pace with technological progress.

Welfare economics is a branch of economics that uses microeconomic techniques to determine the allocative efficiency of a macroeconomy and its income distribution.

It seeks to maximize the social welfare level by examining the economic activities of individuals constituting a society.

Welfare economics is concerned not with the welfare of groups, communities, or populations, but with the welfare of individuals; it takes the individual as the fundamental unit of measurement. Additional assumptions include: individuals are the best judges of their own welfare, people prefer higher levels of welfare to lower levels, and welfare can be sufficiently measured through both monetary indicators and relative preferences.

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Development, one of the main challenges facing developing countries, is also one of the leading issues on the global agenda. Nearly two-thirds of the world’s population live in developing countries. Consequently, the development challenges of these countries—often described as “underdeveloped” or “developing”—are perceived as among the most critical problems in the global economy. In this context, the most important institution under focus is “education,” which constitutes human capital. Today, human capital has become the most important factor of production in a rapidly changing and globalizing world. Almost all societies that have experienced rising welfare levels due to advancing technology and increasing modernization owe this progress to investments made to enhance human capital. Thus, the scale and outcomes of investments in education define the welfare levels of nations by placing people at the center.

Clearly, there is a very strong relationship between education and economic development. In fact, many sources now refer to expenditures on education as “investment.” As the link between human capital and development becomes clearer, the importance of education and educational investment has grown significantly worldwide. This has begun to reduce the relative significance of other factors of production beyond skilled labor. Consequently, the need to improve the level and quality of education as a means of fostering national development has become a universal priority among all countries.

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A small gap between the poorest and wealthiest segments of a population is an important indicator of socioeconomic development. In this context, the share of national GDP received by the poorest 20 percent provides meaningful insights.

Education enables individuals to earn higher incomes, increases their employment opportunities, and improves their quality of life. From an economic perspective, education enhances labor productivity and thereby stimulates economic growth.

Moreover, education has positive effects on other components of welfare, such as health, life expectancy, and social services. For example, each additional year of average schooling in a country is associated with a 9 percent increase in per capita income. According to a study of OECD countries, the annual income loss for each individual without primary education is approximately 4,000 USA Dollars. Furthermore, individuals with a high school diploma can earn on average 10,000 US Dollars more per year than those who have only completed primary school.

According to World Bank data from 2020, a more educated workforce can enable an economy to grow more rapidly. While the proportion of educated labor in developed countries is around 70 percent, it falls below 30 percent in low-income countries. According to OECD reports, countries with a more educated workforce experience an average annual GDP growth rate 1.5 percentage points higher than countries with lower education levels.

According to the United Nations Human Development Index (HDI), which measures welfare levels, countries with higher education levels also have better life expectancy and health conditions. For instance, in countries with highly educated populations such as Norway and Switzerland, life expectancy is 82.7 and 83.4 years respectively. In contrast, in low-income countries with low education levels, this figure ranges between 50 and 60 years.

Another significant research related to education reveals the connection between low education levels and higher health expenditures. According to World Health Organization data from 2019, individuals with low education levels incur health expenditures that are 30 to 40 percent higher than those of educated individuals. Moreover, as education levels rise, the incidence of chronic diseases declines, thereby reducing the burden on healthcare systems.