The Correlation Between Education And The Economy

By Eric Fox | August 28, 2011 AAA

The conventional wisdom is that a state with a better educated population will attract businesses that offer higher paying jobs, and this will typically lead to higher levels of economic output for that particular state. This argument is often used to justify higher spending on schools at the local level.

TUTORIAL: Education Savings Account

Unscientific Testing
One method to empirically test this assertion is to find various government measures of economic output and wealth for individual states and compare that to the education levels achieved to see if we can discern any relationship between these. (Education and training benefit not only the worker, but also the employer and the country as a whole. For more, see How Education And Training Affect The Economy.)

Per Capita Income Measures
The Census Bureau recently released a report on 2009 levels of disposable personal income per capita, which is defined as personal income less personal tax payments and non tax payments. The report ranks each state relative to the overall country using an index, with the United States at an index level of 100. The top six states and index levels are:

Connecticut 132.6
New Jersey 126.3
Massachusetts 124.2
Maryland 121.3
Wyoming 116.4
New York 115.5

Another report from the Census Bureau measures 2008 personal income per capita rather than disposable income, and as expected, the top six states are the same with only a slight change in ranking.

Connecticut $ 56,272
New Jersey $ 51,358
Massachusetts $ 51,254
New York $ 48,753
Wyoming $ 48,608
Maryland $ 48,378

GDP Measures
A more direct measure of economic output for a state is real GDP per capita, and as you might expect, the government reports this statistic as well. The rankings here are slightly different with Alaska and Delaware making the list:

Alaska $63,424
Delaware $62,587
Wyoming $61,049
Connecticut $59,132
New York $53,377
Massachusetts $52,251

The presence of Alaska at the top might be explained through a combination of a sparse population and dependence on mining, which accounts for 25% of total GDP. Delaware has a high concentration on the finance and insurance industry, which represents 37% of GDP and these two industries tend to pay well. (For related reading, see Invest In Yourself With A College Education.)

Educational Attainment
We now look at the educational achievements of the various state populations to determine if this is associated with higher per capita GDP or higher personal income. One measure that can be examined is the percentage of residents that have an advanced college degree.

The three states that rank highest using this metric are Massachusetts, Maryland, and Connecticut, with 16.4%, 15.4% and 15.2% respectively, of residents with an advanced college degree. This is calculated using 2008 data and includes only residents over 25. Virginia and New York are tied for fourth place in educational attainment, with 13.8% of the population achieving this higher level of education.

Outliers
An unscientific look at all this data seems to point to a positive correlation between the education level of a state's population and economic output. However, there are some outliers that are hard to explain.

Wyoming is in the top six for both personal income and real GDP per capita, but is at the bottom of educational achievement with only 7.9% of the population holding advanced degrees. Alaska also follows a similar pattern, and ranks first in GDP per capita, but has only 9.7% of the population holding advanced degrees.

Another outlier is North Dakota, where only 6.6% of state residents have advanced degrees, putting that state 49th in educational achievement. Despite this poor ranking, North Dakota has real GDP per capita of $46,468, putting it eleventh on the economic output rankings. North Dakota also had the fastest growing GDP from 2006 to 2008, with growth of 7.3%. Connecticut, which is arguably the most educated state, experienced a contraction in GDP over the same time frame.

Bottom Line
Although the link between the education level and economic output of a state might seem obvious and intuitive, it is not as clear as one might expect, as there are a number of outlier states that defy this relationship. Further investigation is needed to explain these anomalies.(For related reading, see What Is GDP And Why Is It So Important?)

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