How important is education to an economy when it is trying to take advantage of new technology or economic situation? An analysis at VoxEU looked at Prussian advances during the industrial revolution and found that education levels predicted industrialization levels.
But while the developments in England were promoted by various factors (e.g. on this site Allen 2009 stresses the role of low energy prices and high wages) or might even have been rather accidental, they have been somewhat different on the European continent. When new machines and work processes became available in England, other countries just had to copy them. The adoption of English techniques and machines was therefore crucial to catch up to the technological frontier. But the pre-conditions were not equal for all. Some regions just had too little education for immediate adoption. So far, the literature has given little attention to the role of education in the catch-up of technological follower nations during the Industrial Revolution.
…By 1816, Prussia had become the world leader in primary schooling (see Lindert 2004) with an average per-county enrolment of 58% among the 6 to 14 year old. Nevertheless, there was strong regional variation in enrolment rates. The county with the lowest enrolment only sent 3% of its children to school in 1816, while it was 95% in the county on the other end of the distribution (Figure 1). In 1849, Prussian enrolment rates had reached an average of 80%. Subsequently, in 1871 we observe an average literacy of 84% in the adult population.
…The aggregate result of the importance of education for industrialisation conceals important sector differences, though. It turns out that in the textile industry, where innovation was less disruptive and child labour more prevalent, education had no effect in either phase of industrialisation. The literature often confirms that the development in textiles was different, because of path dependence, high sunk costs, and child labour. Industrial development in the non-textile sectors, which experienced more radical change or even evolved all new, depended on the availability of an educated population that was earlier aware of the productive potential of new technologies and more capable of adjusting to changed situations.
Basically, education was required for society to easily copy and understand new technologies. Beyond the obvious implications for emerging and competing economies today is its importance to displaced workers. Here is a chart of productivity performance in Latin America:
The important time periods are 1950-1975 (the important-substitution years) and 1990-2005 (the Washington consensus years). The link suggests that the worse overall performance during the Washington consensus years is almost entirely due to a lack in desirable structural change.
For all its faults, IS promoted rapid structural change. Labor moved from agriculture to industry, and within industry from lower-productivity activities to higher-productivity ones. So much for the inherent inefficiency of IS policies!
Under WC, firms and industries were able to accomplish a comparable rate of productivity growth, but they did so by shedding (rather than hiring) labor. The displaced labor went not to higher-productivity activities, but to less productive lines of work such as informality and various services. In other words, the WC ended up promoting the wrong kind of structural change.
This account reinforces the centrality of structural change in driving rapid economic growth. It should also cause us to be wary of productivity studies that focus on what is happening within manufacturing alone. After all, productivity within manufacturing can be stellar, but if manufacturing or other high productivity sectors as a whole are rapidly shedding labor, economy-wide productivity performance will be disappointing.
So what’s happening during our economic challenges today? Are previously productive factory workers moving to other, more productive jobs? Doesn’t seem like it. Factory owners are even starting to increase the workers they hire, but they’re having trouble finding workers with the needed skills – basic literacy and ninth grade math! Again it’s clear that our most important investment is our education system. So why are our public schools losing their funding and going down the gutter.
Here’s a related article on the American jobs machine. The key quote:
Resources – including labor – released via higher productivity are supposed to be channeled into expanding sectors. Moreover, productivity growth is supposed to yield improved economic outcomes via higher real wages. Yet as spencer famously shows, labor’s share of output has been steadily decreasing since the early 1980s. This downward trend was interrupted by gains evident during the tech bubble of the mid-1990s. Apparently, only during that brief, shining moment of generational technological change did the productivity story work as we believe it should, at least since the early 1980’s.
Greg Mankiw links to a similar article relating (educational) inequality to the financial crisis. It’s thesis is kind of dumb (and partisan), but the ideas are interesting.