The Economic Benefits of Literacy: Evidence and Implications for Public Policy
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Mike McCracken and Scott Murray
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Summary
This report provides a non-technical overview of how economists think about literacy and what the available evidence tells us about the economic value of literacy. The evidence indicates that Canadians should be concerned because:
- too many Canadians are failing to acquire the level of literacy skills required for participation in modern Canadian society
- literacy has a large impact on the ability of an economy to generate wealth
- differences in literacy skills generate undesirable levels of social inequality in valued outcomes, including health and education
- a substantial proportion of the taxes we pay are consumed to provide public goods and services to persons with low literacy levels
Economic theory suggests that human capital – what individuals know and can put to productive use – is an important driver of economic growth and that literacy is a key element of human capital. Human capital is tightly linked with literacy, since reading proficiency determines one’s ability to learn as well as one’s ability to adapt to changes in organizations, and in the labour market.
Literacy 'demand' is driven by changes in technology and social organization. Literacy ‘supply’ is determined by learning over the entire life course. Literacy demand and supply are matched in markets that serve as the engines for creating skill-based social inequality. These markets include labour, education, health and the markets that provide access to power and influence in the broader society.
Until recently, empirical research has relied on indirect measures of literacy skill, such as years of schooling and educational attainment, to explore their relationship to individual and national economic success. While literacy skill is a strong predictor of whether an individual will complete high school and/or participate in post-secondary studies, the availability of reliable measures of adult literacy skills provides a means to explore the true economic dimensions of literacy.
The evidence summarized here indicates the following points.
- There are large differences in the level and distribution of literacy skills within and between countries.
- These differences matter to the individual. Higher levels of literacy skill are associated with more stable employment, higher wages, better health, increased educational achievement, and higher levels of social engagement.
- These differences also matter to institutions and to society. The profile of literacy skills in a population influences the performance of schools, firms and communities.
- Literacy also matters at the national level. Differences in average literacy levels explain more than 55% of differences in the long-term growth rate of GDP per capita at both the national and provincial level. The proportion of adults with low literacy levels constrains long-term economic growth rates, and some effects at the national level appear to stem from the increased prevalence of illness and accident suffered by lower skilled adults.
Since literacy challenges begin early in life, and are most effectively addressed at that time, it is thus critically important for Canada to foster literacy from an early age. A National Strategy for Early Literacy is therefore urgent, in order to ensure future social and economic success for Canada as a nation. Inequalities in children’s educational outcomes have been shown to appear early, before school begins (Brownell et al., 2004). However, the short, medium, and long-term benefits of quality preschool programs have been shown to far outweigh their costs (Temple, 2007). These costs are economic as well as social, such as reduced need for remedial education services, and reduced crime and dependency on welfare, as well as improved health, employment and educational attainment (Temple, 2007).
The most noted of these longitudinal studies (e.g., the Abecederian program, the High/Scope Perry Preschool program, the Chicago Longitudinal Study, Head Start) have been conducted in the United States. This discussion can benefit from the analysis of costs and benefits of preschool programs derived from research conducted in the U.S., in light of the absence of any longitudinal Canadian studies of this nature. Indeed, at the Manitoba Centre for Health Policy Analysis, researchers determined that results from one of their studies on predictors and consequences of grade retention were comparable to results from similar research conducted in the U.S. (Guevremont, Roos, & Brownell, 2007). For example, a review of 36 public programs showed that participation in preschool was associated with a 31%, 50%, and 32% improvement in grade retention, special education placement, and high school dropout rates respectively (Barnett, 1995). Cost returns to society for such programs have been estimated at between $2.00 and $8.74 per dollar invested, depending mainly on the socio-economic status of the children, the benefits measured, and the discount rate1 applied (Nores, Belfield, Barnett, & Schweinhart, 2005). Short- and medium-term calculations for the Head Start program estimate that the benefits of the program offset 40 to 60% of the total costs (Nores et al., 2005).
While it is important to invest in early childhood education, interventions which can improve the skills of adults currently facing challenges due to lower literacy levels also need to be considered. In view of the severe economic and social consequences of low adult literacy, including the intergenerational effects on children in families in which adults have poor literacy skills, such initiatives aimed at increasing adult literacy levels would yield significant economic benefits. Improving the literacy skills of adults increases access to higher paying jobs, makes workers more productive, and reduces workplace accidents. At a national level, estimates of the direct costs and benefits of a literacy investment large enough to raise all adults to prose literacy Level 3 imply an initial rate of return of 251%, and an approximate payback period of 4.8 months (Murray, Jones, Willms, Shillington, & Glickman, 2008). In other words, the large estimated returns to individuals and to society more than justify the required investment provided that the Canadian economy can absorb all of the new literacy skill as it is created.
A total investment of $6.4 billion2,3 targeted at all adults who are currently at Level 1 or Level 2 aged 16 to 65 (about 9.1 million people) could raise their literacy skill to Level 3 – the minimum required for full participation in the emerging global knowledge economy and information society (DataAngel, 2009).
1. A ‘discount rate’ is a percentage amount which is used for calculating the future dollar value of an item. Since we do not know what the future value of something is likely to be, the discount rate (percentage) chosen in a calculation is usually a best guess. This is why several different amounts of discount rates are calculated and presented in tables (e.g., one calculation that estimates future value for an item at a 3% discount rate, another column that shows the value of that same item calculated with a 7% discount rate).
2. This estimate is based on a mean investment of $706.41 per Level 1 and 2 learner. This one-time investment in the current generation could be spread over several years, with modest maintenance costs.
3. The resulting economic benefits of this investment will vary considerably by province and territory because of differences in industrial, occupational and wage structures. In a few cases, moving adults to Level 3 precipitates a slight drop in earnings. This reinforces the need for government policies to stimulate the level of skill demand in the economy – policies that would ensure that the Canadian economy is able to absorb and apply the newly created skills.
