Why education spending is a good investment for B.C.

by Robert Allen

Economics Prof. Robert Allen's research focuses on economic growth and technological change in North America and Europe. The following is an excerpt from "The Education Dividend," a report he wrote for the Canadian Centre for Policy Alternatives (B.C. Office). The entire report can be found on the centre's Web site at

The economy of the 21st century will require a highly edu cated work force, and, indeed, the Canadian economy has been shifting in this direction since the 1960s. The expansion of colleges and universities has increased the supply of educated workers, while demand for their skills has grown at least as rapidly.

Data from the 1990s indicate that further expansion of the educational system is warranted. The test is whether the social rate of return exceeds the cost of borrowed funds.

Education involves the cost of building and operating schools, the student's cost of books and supplies, and the wages students forego by studying instead of working.

The principal economic gain from this investment is the higher wages that graduates and program completers earn as a result of their studies. Juxtaposing these figures gives the social rate of return, which shows the combined profitability of education to the student and the Treasury (and thus all citizens.)

Social rates of return are extremely high for finishing high school or completing high school or acquiring a trade certificate, for college career programs, and for university degrees. The profitability of completing high school with either a diploma or trade certification is in excess of 25 per cent in most cases, while the profitability of a college career diploma or undergraduate degree is generally a further 10 to 15 per cent.

Undergraduate degrees in all fields of study are highly profitable for women, and most fields are also profitable for men. Since these rates of return exceed the cost of government borrowing (5 per cent), it is profitable for the province to borrow money to make these investments.

Interprovincial comparisons throw more light on the matter.

In the 1990s, B.C. has increased its spending on education by a greater percentage than has any other province. Much of this increase, however, has simply met the needs of population growth, which has been higher here than anywhere else in Canada.

Pupil-teacher ratios in elementary and secondary schools are higher here than in many provinces, so there is a case for more spending to reduce class sizes and drop-out rates.

Post-secondary participation rates (at both the vocational/career and university levels) are near the Canadian average when participation is measured with enrolment. When program completions are the measure, B.C. does badly at the university level, since this province awards fewer bachelor degrees relative to its population than does any other province.

The number of degrees awarded is far below the growth in demand for university graduates, so there is a strong case for expanding the universities and university colleges at the third and fourth year levels.

Class sizes have grown substantially at the province's universities because enrolment has been increased without significant corollary increases in the number of full-time faculty. An increase in the number of full-time faculty would cut class sizes, providing better education for all undergraduates, and improving completion rates.

B.C. has frozen tuition fees for post-secondary programs at low levels. This is a desirable policy in many respects, since it promotes economic development and greater access, while reducing inequality. However, the provincial government must significantly increase educational spending in order for these objectives to be realized.

B.C. should increase spending on education even if greater spending leads to a deficit or postpones tax reductions. Education is too good an investment to pass up. It is only sound business to borrow money at 5 per cent in order to realize a profit of 10 per cent, 15 per cent, or even 25 per cent.

The demand for educated workers is rising in British Columbia, and the increase is expected to continue into the next millennium. Knowledge-based industries provide the opportunity to diversify the B.C. economy away from the extraction and export of primary resource commodities.

The profitability of investing in education at all levels is very high, and so there is both economic need and popular demand for more spending in this area.

Social rates of return and comparisons with other jurisdictions suggest the following areas require attention:

1. The B.C. pupil-teacher ratio in elementary and secondary schools exceeds the national average. An additional 1,550 teachers would be required to bring the ratio down to the Canadian average (based on 1996/7 figures).

2. A significant proportion of students in British Columbia fail to complete high school. Programs to increase graduate rates warrant further support.

3. B.C.'s universities and university colleges should be expanded to increase the number of bachelor degrees by about 70 per cent, or 8,000 per year. This would bring the rate of university completion up to the Ontario level, which is appropriate since B.C. (like Ontario) is a growth centre of the knowledge-based economy. Most of the expansion should be at the third and fourth year undergraduate level.

4. The colleges and universities need more full-time faculty to reverse the increases in university class sizes that have occurred in the last decade, as well as to teach the additional undergraduates that the provincial economy requires. To erase the damage of funding restraint and return the student-to-full-time-teacher ration to its 1980 value would require another 1,800 full-time teachers in the university and university colleges.

In addition, the following conclusions regarding educational funding were implied by the analysis.

5. The long-run success of the B.C. economy means that the province's population has been growing -- and will continue to grow -- faster than that of the rest of Canada.

B.C. not only must provide the resources for its existing population -- which all jurisdictions must do -- but in addition must build and operate schools to accommodate the new immigrants. The latter expenditure implies that B.C. must invest at a higher rate than most other provinces.

B.C. now spends a smaller fraction of its GDP on education than all provinces except Ontario and Alberta. B.C. should increase its investment rate in education to be the highest in Canada if it expects to continue to be a growth centre in the knowledge-based economy of the 21st century.

6. Most funding for B.C. colleges and universities has come from the provincial government (including federal transfers to the province for post-secondary education).

Government funding has one great advantage over tuition fees as a source of revenue; namely, that the provincial government can borrow at lower cost than private individuals. Hence, if the province finances education, it will be profitable to expand the system beyond the point where private individuals would find it profitable.

A larger system would be good for growth and good for equality in the province. To secure these favourable outcomes, however, the provincial government must expand funding for post-secondary education.

College and university graduates, in fact, pay for more than the cost of their education through the higher taxes they pay over their lifetimes. These taxes, in effect, are compulsory contributions to their alma maters.

The federal and provincial treasuries should pass these contributions on to the colleges and universities and not use them to retire debt or reduce taxes.