EDUCATIONAL OUTCOMES IN OECD COUNTRIES
32
Columns (5) and (6) of Table 10 report results under the assumption that the average
working life is 35 years, rather than 40 years, which appears to be a more reasonable
estimate for many OECD countries. A shorter working life means that the replacement
of the workforce with better-educated individuals completes faster, so that the aggregate
value of the education reform increases. Assuming a 35 year work life yields a
projection estimate of $304 trillion of the total value of the education reform.
Finally, the rate at which future returns are discounted obviously makes a substantial
difference for the net present value of a reform whose main returns do not start to pick
for a whole generation. Thus, rather than using the common-practice 3 percent discount
rate of the baseline model, columns (7)-(10) of Table instead use discount rates of 2.5
percent and 3.5 percent, respectively. The resulting discounted present values of the
projected returns are $369 trillion and $207 trillion, respectively. Thus, the precise
values of these long-run projections are clearly sensitive to the choice of the discount
rate. For a larger band of discount rate of 2 percent to 4 percent, the total discounted
reform value would be $497 trillion and $157 trillion, respectively (not shown).
However, other projections of long-run effects, in the area of climate change, have used
much lower rates at which to discount the future. In particular, the influential Stern
Review report places a much higher value on future costs and benefits by employing a
discount rate of only 1.4 percent (Stern (2007).24 That report also assumes a slightly
lower rate of potential growth of 1.3 percent (rather than 1.5 percent as in our other
models), and this is used in our next estimate. Note that what is ultimately relevant for
the projections is the difference between discount rate and rate of potential growth,
yielding an effective discount rate of 0.1 percent in this scenario. If we were to adopt the
discounting practice of the Stern report, the present value of the education reform would
sum to a staggering $636 trillion, or roughly 15 times the current GDP, by 2090 (as
reported in the final two columns of Table 10).
The alternative projections under different parameter choices indicate that, while some
of the parameter choices clearly have a big impact on the estimated reform value, even
highly conservative parameter choices yield extremely large estimates of the aggregate
value of the reform effects across the OECD.
6. POLICIES TO IMPROVE EDUCATIONAL ACHIEVEMENT
The previous discussion has stressed the importance of cognitive skills for economic
growth. The evidence indicates a strong impact of skills that can give rise to immense
long-term benefits. Table 11 summarizes the projection results for the three scenarios
and two underlying models under the baseline parameterization. Normalized against the
discounted value of the projected future GDP of the OECD over the same time span
(until 2090), the value of the reform amounts to 4.3-13.8 percent of the present value of
future GDP. Independent on whether the underlying economic model is specified in
24 Note that this alternative discount rate is highly disputed in the economics literature (e.g., Nordhaus (2007); Tol and Yohe
(2006).