Education and Economic Development

Table of Contents

Health, Education, and Economic Development

Health and Education as Objectives of Development

Education and health are basic objectives of development; they are important ends in themselves. Health is central to wellbeing, and education is essential for a satisfying and rewarding life.

Health and Education as Inputs of Development

At the same time, education and health act as inputs to economic development. Because:

Education enables people to learn new technologies and acquire the skills necessary for a country’s growth and development. While greater education capital may improve the return on investments in health, many health programmes rely on basic skills often learned at school, including personal hygiene and sanitation.
Good health is necessary for people to be productive. When people are healthy, they can work better and learn effectively. Education is more successful when people are healthy. Further, greater health capital may improve the return to investments in education, because health is an important factor in school attendance and in the formal learning process of a child.

Their dual role as both inputs and outputs gives health and education their central importance in economic development.

The following two diagrams show that countries with higher literacy rates and longer life expectancy tend to have higher GDP per capita, indicating a positive relationship between education, health, and economic development. Better education enhances human capital and productivity, while improved health increases labour efficiency and longevity. Together, these factors contribute to higher income levels and sustainable economic growth.

Income, Health & Education

Health and education levels are much higher in high-income countries.

Higher Income → Better Education & Health
Better Education & Health → Higher Income

With higher incomes, both people and governments can afford to spend more on education and health, and with better health and education, higher productivity and incomes become possible. Education improves skills; health improves the capacity to work and learn.

Policy Implication: Because of these relationships, development policy needs to focus on income, health, and education simultaneously.

Costs and Benefits of Education

Costs of Education

Two types of costs of education

Private costs
Social costs

Private Costs

Private costs refer to the direct and indirect expenses that individuals, families, or organisations incur while pursuing education. Private costs can be direct and indirect.

Direct Private cost (Out-of-Pocket Expenses)

Direct private costs or out-of-pocket expenses are the money that individuals directly pay for their education, including expenditures on:

Challan fees
Tuition fees
Hostel dues
Books & uniforms
Transport
Online resources

Indirect Private Cost (Opportunity Costs)

Indirect private costs are the opportunity cost of pursuing education, such as:

Foregone earnings
Time invested
Delayed life milestones (buying a home or a car)
Starting a business
Delayed marriages, etc.

Social Costs

Social costs are the costs that are incurred by society/public/government in providing education. They are also categorised into direct and indirect social costs.

Direct Social Costs

It includes direct monetary expenditure of the government on:

Educational infrastructure (buildings, classrooms, libraries, laboratories)
Technology infrastructure (computers, software, online courses)
Salaries (teaching and non-teaching staff)
Government grants, scholarships, and bursaries
Health services, etc.

Indirect Social Costs

It includes opportunity costs for society as a whole, such as:

Productivity foregone — students not participating in the labour market
Tax revenue foregone from students not working
Pre-tax earnings are usually used as a proxy for productivity foregone
Long-term cost of human capital formation for the nation

Benefits of Education

Private Benefits

Educational benefits accruing to individuals, families, or organisations investing in education are known as private benefits of education. These are of two types: direct and indirect private benefits.

Direct Private Benefits

These include:

Higher lifetime earnings/income
Greater career opportunities
Job security and stability
Higher social status
Improved quality of life

Indirect Private Benefits

These are:

Psychological satisfaction
Movement up the socioeconomic ladder
Better decision-making capacity
Improved personal health awareness
Greater civic participation

Social Benefits

Educational benefits enjoyed by the society or government from educational investment are referred to as social benefits of education. These are of two types: direct and indirect social benefits.

Direct Social Benefits

These include:

Reduction in crime
Improved health and nutrition
Poverty reduction
Increased charity

Indirect Social Benefits

These are:

National integration
Population control
Inculcating productivity-related habits such as hard work, punctuality, self-reliance, etc.
Increased capacity to save money

Investment decision on education

Investment Decision: Individuals invest in education when expected Private Benefits > Private Costs (positive net return).
Society invests in education when expected Social Benefits > Social Costs — justifying public funding.

Education and Earnings

Investment in education generates expected future income over the years. This expected income can be calculated by the following formula:

$\sum_{t=1}^{T} \frac{E_t - N_t}{(1+i)^t}$

Where E is income with extra education, N is income without extra education, t is year, i is the discount rate used to convert future value into present value, and the summation is over expected years of working life.

The rate of return to education will be higher when

The discount rate is lower
Direct or indirect costs are lower,
The benefits are higher.

Trade-offs in the decision to continue in School

Some Assumptions

Suppose that the individual works from the time he finishes school until he retires, which is taken to be 66 years.
The primary school graduate starts earning at the age of 13, beginning work immediately after primary school.
Secondary school graduates start earning at the age of 17, four years after primary school graduates.

Costs of Higher Education

Those individuals who opt for secondary education have to face two types of costs, direct and indirect.

Direct cost includes tuition fees and other expenses related to education during the secondary school years.
Indirect cost includes the foregone income of 4 years, the earnings they could have made if they had worked instead.

The individual who opt work after primary education neither have to face direct cost of tuition fees nor indirect cost of forgone income.

Benefits of Higher Education

After secondary school education, 17-year-old individuals earn a lifetime income that is more than that of individuals who have a primary education and started working at the age of 13.

These are the benefits of higher education, which are labelled as blue. The additional lifetime earnings of the secondary school graduate over the primary graduate represent the net returns to investing in secondary education.

Human Capital Theory

Human capital theory treats education as an investment in people, increasing their productivity and earning capacity. Human capital refers to the productive investments in human beings, including expenditure on health, education, skills, and abilities, which raise their productivity and earnings.

Human Capital Earnings Function

The human capital earnings function estimates the effect of investments in human capital, such as education, experience, trainings on wages and economic outcomes. Jacob Mincer formalised human capital theory as an empirical earnings function.

Mincerian Earnings Function

The Mincerian Earnings Function explains the relationship between an individual’s education, experience, and earnings. According to this model, the log of earnings depends on years of schooling (S), years of work experience (X), and the square of years of work experience.

$\ln(Wage_i) = \beta_0 + \beta_1 S_i + \beta_2 X_i + \beta_3 X_i^2 + u_i$

Explanation and Interpretation of Mincerian Earnings Function

Natural log of earnings [(lnWage_i)]: Taking the natural logarithm of earnings helps to linearise the relationship between earnings and the explanatory variables, making it easier to estimate using a linear regression model.
Years of Schooling (S_i): This variable captures the effect of formal education on earnings. The coefficient β₁ measures the rate of returns to education, and it represents the percentage increase in earnings associated with an additional year of schooling.
Years of Experience (X_i): Work experience is another critical factor affecting earnings. The coefficient β₂ measures the percentage increase in earnings for each additional year of work experience.
Squared Term of Experience (Xi²): The inclusion of the squared term allows for the modelling of diminishing returns to experience. The coefficient β₃ captures this non-linear relationship.
Error term (u_i): This term captures the effect of unobserved factors on the log of wages that are not included in the model.

Extensions of Mincerian Earnings Function

The Mincerian Earnings Function can be extended to include other variables such as gender dummies for gender wage differential, regional dummies for regional wage differential, etc.

The extended Mincerian earnings function can be written as:

$\ln(W_i) = \beta_0 + \beta_1 S_i + \beta_2 X_i + \beta_3 X_i^2 + \beta_4 G_i + \beta_5 R_i + \cdots + \varepsilon_i$

Explanation and Interpretation of Extended Mincerian Earnings Function

Gender Dummy Variable (G_i): Captures the gender wage gap, the difference in earnings between male and female workers with the same education and experience level. β₄measures this gender wage difference
Regional Dummy Variable (R_i): Captures the region-wage gap, urban vs. rural differentials, and provincial differences, etc. β₅measures this region wage difference

Other Possible Extensions;

Occupation type, industry sector, firm size, public vs. private sector employment, ethnicity, language, social networks.

Suggestions for further readings:

Our World in Data

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Muhammad Minhaj Akhtar

Muhammad Minhaj Akhtar is a Lecturer in Economics at Government Graduate College Jauharabad, Pakistan. He holds an M.Phil. in Economics from Quaid-i-Azam University, Islamabad, and an MSc in Economics from the University of Sargodha, where he earned a Silver Medal. His academic passion lies in Econometrics, with a strong focus on applying empirical methods to real-world economic issues. Through MinhajMetrixHub, he shares learning resources, research guidance, and practical econometric insights for students and researchers.

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