The Connection Between Education and Wealth

This column is authored by Sourobh Das, Content Writer at EduPadhai

education and wealth

“Education, beyond all other devices of human origin, is the great equalizer of the conditions of men, the balance-wheel of the social machinery” – Horace Mann 

Education has always been the trump card for the middle-class in their aspirations to become wealthy. Every year we see thousands of students enter college or university for higher education in the hopes of getting high-paying jobs and becoming rich as soon as possible. It has always been believed that education leads to financial prosperity and success. Education is an investment in human capital and it is believed to boost efficiency and productivity.The more specialized you get, the higher your earnings become. The type of degree matters too. Empirically, a professional degree commands much greater incomes than normal graduate degrees. A four-year degree can be the key to financial success in the long run.

When we talk about the connection between education and wealth, the focus should be on income more than wealth. With increasing tuition fees and student loan debt all over the world, wealth accumulation takes longer and the path remains rough. It is not impossible but definitely difficult in the short term. That is why affordable education, along with affordable healthcare is a trademark of great and prosperous countries. For a government, Investment in education is one of the safest and surest ways to improve the economic condition of the country and standard of living of low-income households and individuals. It also has other less obvious benefits like lower crime rates and improved personal health.

This representation of US families taken from a study conducted in 2013, shows the income distribution across education levels. The correlation becomes obvious.

While there is no magical formula to determine the true value of a degree or diploma as it depends on multiple factors like how one uses that degree or diploma, how productive that person is or which career he/she has chosen, it has been shown by many studies that there is a strong correlation between education and wealth. In a 2015 study by Federal Reserve Bank of St. Louis’ Center for Household Financial Stability, it was inferred that wealth is strongly linked with education. The study found that Americans who had an advanced degree were 50 times more likely to become millionaires than those who only have a high school diploma. The odds for a person without a high school diploma of becoming a millionaire were only 1 in 110, while it was 1 in 4.6 and 1 in 2.6 for graduates and post-graduates respectively. The median family with a graduate or professional degree had 95% more wealth than the median family without a high school diploma. The accumulated wealth also grows much faster for individuals with a graduate/professional degree than those without one. Department of Education of New Zealand had concluded in its 2013 annual report that the average earnings of those with a tertiary education were 24% higher than those with higher secondary or non-tertiary education. There might be other factors at play here but the correlation between education and wealth has been found to be quite strong. What we are trying to investigate here is whether the causality is strong too.

To establish causality, we can look at the correlation between income and specialization, as it signifies the higher levels of education. For example, from data of 2016 on, it was shown that in the medical sector, a specialist earns almost twice as much as a general practitioner. While the salary data does not show this kind of disparity for most other sectors in India, this disparity exists in most Western countries where salaries are closely related to the level of specialization. On an average, studies have shown that with every year of schooling, annual earnings increase by 10 percent. While this has been proven, opportunity costs of staying in school and missing earning income also rears its ugly head. As long as the opportunity costs are balanced out by the long term benefits of a degree, it makes sense to remain in school and maximize income as much as possible in the long term.

While there are many college dropouts who have become successful entrepreneurs and have earned oodles of money, and while there are articles written about how the value of a college or university degrees are diminishing or that they are not really worth it, the general trend statistically remains strongly in support of education. Not only does education make it easier for older workers to find jobs, it has also been shown to reduce unemployment significantly in many countries in times of economic downturn. Of course, accumulation of wealth is meaningless without financial literacy. Sadly, most schools and colleges seem to skip past it. But let’s keep that discussion for some other day. That alone can take up 2-3 articles like these.

As of now, I would strongly suggest the people reading this who are yet to graduate to take their education very seriously. Even if you choose not to work for some organization, your education will still remain invaluable when starting your own venture. Truth be told, education never ends with a degree. Life is a long journey and learning should be an integral and everyday part of that journey. In the end, to be successful, what matters is the value you bring to the table and how you use that to produce results, sometimes tangible, sometimes intangible.

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