How Education and Training Affect the Economy

How does a nation’s education system relate to its economic performance? Why do most workers with college degrees earn so much more than those without degrees? Understanding how education and training interact with the economy can help explain why some workers, businesses, and economies flourish, while others falter.

As the labor supply increases, downward pressure is placed on the wage rate. If employers’ demand for labor doesn’t keep up with the labor supply, wages usually fall. An excess supply of workers is particularly harmful to employees working in industries with low barriers to entry for new employees—that is, those with jobs that don’t require a degree or any specialized training.

Conversely, industries with higher education and training requirements tend to pay workers higher wages. The increased pay is due to a smaller labor supply capable of operating in those industries, and the required education and training carries significant costs.

KEY TAKEAWAYS
The knowledge and skills of workers available in the labor supply is a key determinant for both business and economic growth.
Industries with higher education and training requirements tend to pay workers higher wages.
Differences in training levels is a significant factor that separates developed and developing countries.
An economy’s productivity rises as the number of educated workers increases since skilled workers can perform tasks more efficiently.
How Education Benefits a Nation
Globalization and international trade require countries and their economies to compete with one another. Economically successful countries will hold competitive and comparative advantages over other economies, though a single country rarely specializes in a particular industry. A typical developed economy will include various industries with different competitive advantages and disadvantages in the global marketplace. The education and training of a country’s workforce is a major factor in determining how well the country’s economy will perform.

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