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Article Excerpt
Most observers view Canada as a country that has a good education system with a high level of public funding. However, its performance in generating a skilled labour force does not stand out among the 30 member countries of the Organisation for Economic Co-operation and Development (OECD). As well, results from the International Adult Literacy Survey (IALS), conducted between 1994 and 1998, place Canada in the middle of the pack in terms of literacy scores among a group of 20 countries. (1) The IALS defines literacy skills as "the ability to understand and employ printed information in daily activities, at home, at work and in the community, to achieve one's goals, and to develop one's knowledge and potential". The survey tested these skills for individuals between 16 and 65 years of age over three broad areas--prose literacy, document literacy and quantitative literacy. It sampled everyday job tasks, ranging from simple to highly complex and thought to be closely associated with labour productivity.
Canada ranked respectively 5th, 8th and 9th on the prose, document and quantitative literacy scales (OECD 2000). However, many of the countries located at the lower end of the sample are significantly less developed economically than Canada. They include Chile, the Czech Republic, Hungary, Poland, Portugal and Slovenia. Canada does not perform well when compared to countries at a similar level of development. Perhaps more worrisome is the fact that, when looking only at less-educated individuals, those who have not completed upper secondary school, Canada ranks respectively 13m, 14th and 14th in prose, document and quantitative skills. As well, among individuals aged 16-to-25 who have completed secondary education, Canada ranks 8th, 8th and 13th in prose, document and quantitative skills, indicating that the Canadian schooling system is not doing well at providing young people with the skills required to perform well in the labour market.
Currently, most discussion focuses on the role of post-secondary education in providing highly skilled workers for the knowledge economy as a means of ensuring international competitiveness. However, our recent research (Coulombe, Tremblay and Marchand 2004) reminds us of the equal, if not greater, importance of increasing the general level of literacy and numeracy skills among young people, to some extent the purview of primary and secondary schools. The research--novel because it is based on direct measures of skills, rather than the usual crude proxies that use educational attainment--strongly suggests that there are potentially large pay-offs from investment in these less-glamorous sectors, or at least in what should be some of their core activities. The pay-offs come in the form of increased economic growth, which benefits society as a whole. They force us to rethink federal and provincial priorities in the area of the provision of human capital.
In light of Canada's performance in skills accumulation and of recent evidence on the macro-economic returns from raising the general skills level, we argue that Canadian governments may not be investing enough in literacy and numeracy skills and that this may have substantial adverse effects on economic growth and on the long-run standards of living of Canadians. As a result, governments should adopt a comprehensive skills strategy, one that would exploit the different channels through which economies accumulate skills, not the least of which would be to concentrate more resources on raising the competencies of people at the bottom of the skills spectrum and targeting skills acquisition and upgrading for workers.
The Elusive Link Between Skills and Economic Growth
There is little doubt that better-educated individuals have, on average, more rewarding jobs and higher incomes. Common sense also dictates that better educated societies are wealthier. Empirical researchers in economics have long devoted substantial efforts to estimating the individual and the social returns of education. Following a long tradition established by Mincer (1974), labour economists have been able to estimate a clear positive individual return from the statistical relationship between years of schooling and wages at the individual level. The estimated effect of one extra year of schooling on individual wages varies among countries and across time, estimated at 5 percent-to-15 percent.
However, empirical researchers have been less successful in their efforts to link various indicators of educational achievement at the country level to aggregate measures of welfare, such as the productivity level or per capita income. Somewhat paradoxically, in the last two decades or so, empirical macroeconomists have not been able to clearly identify a positive gain from education in developed countries. Some commentators argue that small macro-economic returns may indicate that education improves the labour market performance of individuals and provides a signal of high ability to potential employers, rather than making them more productive. This theory, first advanced by Spence in 1973, indicates that education is essentially a sorting device, rather than one that provide skills that have a significant effect on productivity.
This debate raises an important economic policy issue related to the role of government in financing the education system. If the hypothesis is correct, government support for education would not be defensible from an economic efficiency point of view. On efficiency grounds, government intervention can only be justified by the presence of external benefits from education or by existing market imperfections in education investments. Because the existence and size of external social benefits and market failures are difficult to test empirically, the case for government support of education rests critically on the macro-economic estimates of aggregate returns from education. Our recent study (Coulombe, Tremblay and Marchand 2004) provides exactly that kind of evidence. Our results show that the returns from investment in skills in the form of enhanced economic growth are, in fact, substantial and may be highly beneficial to society as a whole.
The intense fiscal pressures faced by governments in the 1990s, combined with increased public support for health care spending, have led to decreased government support of education. At the same time, education policy debates in recent years have mainly focused on the post-secondary level, with topics ranging from tuition to boosting the number of graduate students. While the need to improve health care systems in Canada appears indisputable, compromising investment in skills acquisitions is unlikely to be a wise solution. A more balanced approach to the allocation of scarce public funds between health care and education would appear more appropriate, especially in light of the fact that investment in education will ultimately determine our capacity to generate wealth and to provide better health care. And while education should be the cornerstone of our skills strategy, the role of education in generating skills has to be complemented by adult training and immigration. That is especially so because demographic trends in the next few decades will limit the contribution of initial education to overall skills accumulation.
Before summarizing our recent results on the macro-economic returns from skills accumulation and discussing the potential policy implications of our results, we briefly explore the potential efficiency rationale for government policies to promote the acquisition of skills.
The Rationale for Policy Intervention in Skills Investment
The desire to increase the productive capacity of individuals does not, by itself, justify public spending on skills investment. Any desirable government intervention has to be grounded in the presumption that private markets are, for a variety of reasons, not leading to the appropriate level of investment in skills. There are, however, numerous rationales for public investment in skills.
For example, there are well-known imperfections in credit markets that prevent liquidity-constrained individuals from investing in this area. These imperfections arise essentially because human capital can rarely be used as collateral on loans, even when the expected return from education is substantially above the return on other types of investment. Therefore, public funding is usually seen as critical in broadening access to education and ensuring equality of opportunity for all, regardless of family background.
Even in the absence of credit market failures, decisions to invest in education, or to acquire skills...
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