OXFORD REVIEW OF ECONOMIC POLICY, VOL. 20, NO.

2
DOI: 10.1093/oxrep/grh018

EDUCATION AND ECONOMIC

PERFORMANCE: SIMPLISTIC THEORIES
AND THEIR POLICY CONSEQUENCES

ALISON WOLF
King’s College London1

A largely unquestioned consensus proclaims that educational policy is an effective tool for delivering
prosperity and increasing rates of economic growth. This consensus rests on far less secure foundations
than is commonly supposed. International comparisons confirm that, as they become richer, people seek
ever more education for their children; but provide no clear-cut evidence of economic benefits accruing to
countries which are high-spending in education terms. Analyses which extrapolate from the incomes of
educated individuals rest on assumptions about how wages are determined, and the extent to which
rewards are for skills acquired in schooling, which are highly questionable. Moreover, an uncritical
belief in educational expansion leads to target-driven policies with serious negative effects on educa-
tional quality. A more realistic view of education’s economic impact, and a move away from centralized
planning for economic ends, would actually improve the quality of education.

I. INTRODUCTION draw directly on university-based research, and,

High levels of formal education are commonly seen
as one of the major prerequisites of the developed
world’s current wealth, and as one of the major
determinants of future growth and prosperity. At
one level this is so obvious as to be banal. No modern
economy could function without large numbers of
people who have attained high levels of formal
education; and innovatory companies (especially
those involved in international trade) frequently
1
I would like to thank the editors, the reviewers, and participants in an editorial seminar in Oxford for very helpful comments
on an earlier draft.
indeed, provide direct funding for it. If schools and
universities were all closed down permanently, fu-
ture growth rates would unquestionably plummet
and, over time, national income would fall far below
current levels.
However, it does not follow that education policy is
therefore an effective tool for ensuring economic
prosperity, let alone that it can guarantee specific
levels of growth or national income. Many policy-

Oxford Review of Economic Policy vol. 20 no. 2 2004

© Oxford University Press and the Oxford Review of Economic Policy Limited 2004; all rights reserved. 315
OXFORD REVIEW OF ECONOMIC POLICY, VOL. 20, NO. 2
makers currently believe that it does and can. Their
views are based on imputed relationships between
education and the economy for which the empirical
evidence is, in fact, extremely weak. This matters
because current policy beliefs feed into major deci-
sions about educational spending and governance
which at best divert the system from activities which
are likely to have a much more direct impact on
future prosperity, and at worst may even be per-
verse in their economic effects.
This paper first outlines the current policy consen-
sus in this area. It then discusses and evaluates the
theoretical basis for this consensus. Why might it
seem plausible to expect that increasing the amount
of education people receive will deliver increases in
output? And why, conversely, might an apparent
relationship between education and output amount
to less than it seems? Following this, the paper
summarizes the empirical evidence. It asks how far,
at between-country level, the evidence supports the
idea that high levels of education spending are
associated with greater prosperity; and also, at
individual and within-country level, how much we
know about substantive links between people’s
education and their productivity. Section IV of the
paper then returns to current and recent policy-
making, with particular reference to the UK, and
evaluates recent policies inspired by beliefs about
the relationship between education and the economy.
The concluding section summarizes the scope of
conventional policy, and its limitations; and makes
some brief recommendations for change.
(i) The Current Consensus
Policy-makers have, over the last 40 or so years,
attempted to use education as a mechanism for
increasing economic growth. Indeed, the view that
expanding education contributes directly and pow-
erfully to economic prosperity is so pervasive that
people barely notice or remark on it. For David
Blunkett, then Labour’s secretary of state for edu-
cation, ‘learning is the key to prosperity. Investment
in human capital will be the foundation of success in
the knowledge-based global economy of the twenty-
first century’ (Blunkett, 2000, p. 3) His Conserva-
tive predecessors fully agreed—so did his col-
leagues. The Chancellor, Gordon Brown, in con-
junction with the then governor of the Bank of
England, argued in the pages of the Financial
316
Times that ‘education is the best anti-poverty and
social and economic development strategy. . . . It
provides . . . the skills to transform [people’s] lives
and lift their nations’ (Brown and George, 2002).
Garret Fitzgerald, prime minister of the Republic of
Ireland for most of the 1980s, is convinced that the
country’s growth surge and emergence as the
‘Celtic Tiger’ are due in large part to the ‘long-
established and, I think, universal Irish conviction
that education is key to economic growth’ (Fitzgerald,
2004). Similar quotations can be found in myriad
party manifestos and OECD, EU, or UN reports. In
the UK, a comparison of White Papers and govern-
ment commissions before and after the 1960s shows
that, whereas earlier documents gave major promi-
nence to non-economic purposes for education, the
later ones are concerned almost entirely with edu-
cation, the economy, growth, and ‘employability’.
French secondary-school policy has been restruc-
tured around a goal of taking 80 per cent of pupils to
baccalauréat level ever since cabinet members
visiting Japan noted Japanese high-school gradua-
tion rates and linked these to the country’s then high
growth rate. A number of countries have adopted
precise numerical targets for higher education par-
ticipation on explicitly economic grounds. They
include Germany (40 per cent), Sweden (50 per
cent), and the UK (50 per cent): the UK’s target
formed part of the 1997 Labour Party Manifesto,
and has been central to government policy since the
Labour victory of that year. Justifying and promot-
ing it in a feature article for the Guardian newspa-
per written on 23 May 2002, the UK’s then Secre-
tary of State for Education, Estelle Morris, ex-
plained that ‘A one percentage point increase in the
number of workers with higher education qualifica-
tions raises GDP by 0.5 percent.’
It is clearly true that, on average, richer countries
have more of their population being educated for
many more years than poorer ones: but then they
also have more motorways, more hospitals, and (at
least for the moment) more symphony orchestras.
No one is suggesting that a direct way to greater
national wealth is to spend more and more on any of
these, even though a good case can be made out for
the link between any one of them and individual
citizens’ welfare—and even, in the case of motor-
ways (transport) or hospitals (healthy workers)

between their operations and economic dynamism.
Clearly, the enthusiasm for educating our way to
growth must rest on some underlying mechanism,
assumed or made explicit, which is assumed to be
extremely powerful. This is, indeed, the case.
II. EDUCATION, HUMAN CAPITAL,
AND THE ‘RESIDUAL FACTOR’
The current belief in education as a powerful tool of
economic policy can trace its origins to the 1960s, in
the seminal work of Gary Becker (Becker, 1964;
3rd edn, 1993), and also that of Edward Denison on
the ‘residual factor’ in economic growth (Denison,
1962; OECD, 1964). Following Becker, economists
tend to discuss the importance of ‘human capital’,
whereas non-economists tend to talk about the
importance of the work-force’s ‘skills’ (National
Skills Task Force, 2000; DfES, 2003).
(i) What Might Education Achieve?
As Becker explained in the preface to the first, 1964
edition of his book, Human Capital, his work has its
origins in ‘the finding that a substantial growth in
income in the United States remains after the
growth in physical capital and labor has been ac-
counted for’ (Becker, 1993, p. xxi). He and others
argued for the importance of recognizing that peo-
ple’s knowledge and skills are a form of capital that
can yield income in just the same sense as ‘a bank
account, one hundred shares of IBM, assembly
lines’ (Becker, 1993, p. 15). Such capital is embod-
ied in people—hence human capital. Education and
training are, Becker argues, the most important
investments made in human capital, but his discus-
sion emphasizes the importance of informal educa-
tion within the family, and of on-the-job training, as
well as formal instruction.
At a general level, the idea that investments in
human capital matter for economic progress seems
not only plausible but intuitively and obviously cor-
rect. A more skilled and ‘higher quality’ work-force
is (almost by definition) more likely to be productive;
to note and correct problems before they affect
output; to understand what customers want; to
suggest and introduce improvements. Many inven-
tions that, over the last century, have made people’s
lives safer, more comfortable, and more enjoy-
A. Wolf
able—whether it is personal computers and mobile
telephones, or drugs, or travel insurance—depend
on the existence of highly trained researchers,
engineers, and financial administrators. None of
those people could carry out their jobs without
extensive education.
However, the fact that human capital is of critical
importance to modern societies does not in itself
establish that all and any forms of educational
‘input’ automatically raise their recipient’s marginal
product. Many policy-makers, unfortunately, tend
to assume just that. This, in turn, derives in large part
from the way in which the links between education
and growth have been measured and analysed and
presented to receptive political ears.
As already noted, Becker’s work on human capital
took its direction from economists’ realization that
changes over time in physical capital and labour-
force size left large parts of the concurrent change
in countries’ income unaccounted for. The work of
Edward Denison (1962, 1964) was extremely im-
portant in identifying other factors which might
account for economic growth. Almost all of these
relate to the basic components of classical growth
theory (land, capital, labour) but involve breaking
them down further (e.g. to differentiate among
factors that improve the quality and efficiency of the
work-force). Denison also emphasized the ‘ad-
vance of knowledge’, or technical progress.
A critical and extremely influential aspect of
Denison’s, and much other later work, is that it
offered very precise estimates of how much differ-
ent factors influenced growth rates and, from this,
recommendations about how to ensure growth in
the future. For example, Denison offered a number
of different ways in which the USA might increase
its growth rate by 1 percentage point. These include,
for example, an increase by 1 hour in the average
working week, and a doubling of net immigration
between 1962 and 1982—but also, ‘Add one-and-a-
half years to the average time that would otherwise
be spent in school by everyone completing school
between now and 1980’ (Denison, 1964, p. 21).
This combination of simplicity and specificity—in
terms of inputs and outputs—is obviously very
appealing to any policy-maker. Two other points
about it are crucially important to understanding
317
OXFORD REVIEW OF ECONOMIC POLICY, VOL. 20, NO. 2
contemporary politicians’ infatuation with ‘educa-
tion for growth’, and its effects. The first is that the
measure of education used by Denison and by most
other contemporary and later economists studying
education, economic performance, and growth, is a
very simple one: namely, years of formal education
completed. This is because it is by far the most
generally available measure (and a fairly reliable
one in straight measurement terms, even when self-
reported). However, it carries with it the very
questionable assumption that a year of schooling
can be treated as fairly uniform in terms of what is
learned, regardless of when, where, and at what age
it occurs. A second and equally important point
about precise estimates of how education contrib-
utes to output (and growth) is that they rest on the
assumption that individuals’ earnings reflect their
individual marginal product (OECD, 1964; Temple,
2001). The incomes of the educated can, in that
case, be used to derive accurate and unbiased
estimates of the contribution of education to eco-
nomic output in the past, and in the future.
For just about any country you care to name, there
is, indeed, a consistent and positive relationship
between length of education and earnings: the edu-
cated earn more. Analyses generally show a posi-
tive rate of return to each and every additional year
of education (see, for example, Griliches 1997;
Sianesi and Van Reenan, 2000). More education
certainly seems like a good idea for the individuals
concerned; but these findings have also been critical
in convincing politicians that ratcheting up the num-
bers of highly educated workers is an effective way
to deliver economic growth. But are such earnings
differences indeed a direct result of formal educa-
tion developing skills which, in turn, raise individuals’
marginal product?
(ii) Why Are the Educated Paid More?
Extrapolating from individual rates of return to
education and economic policy recommendations is
currently most common for higher education. The
continuing income advantages of graduates are
used to argue that university expansion will generate
growth, as individuals’ ‘upskilling’ translates into
higher output, and, indeed, that the economy there-
fore ‘needs’ more graduates (CBI, 1994; CIHE,
2003). This is the view expressed by politicians such
as Estelle Morris (and her departmental speech-
318
writers), as quoted in section I. In addition, develop-
ment funding and policy recommendations have
used rate-of-return analysis to set priorities for
education: for example, in downgrading support for
vocational education (see, for example,
Psacharopolous, 1985; Glewwe, 1996).
However, if graduate salaries do not reflect or
depend on the skills they learned as undergraduates,
then one cannot extrapolate from them to future
benefits to be gained from additional graduates.
Similarly, in the development case, if wages do not
reflect marginal product, then they are not a secure
basis on which to decide relative funding priorities
within education. Put more generally, estimates
may be misleading for two important reasons. The
first is if the higher earnings of the educated are not
because of their education, but because of other
characteristics they possess; and the second is if
people’s wages do not reflect their marginal prod-
uct.
At its most extreme, the first of these arguments
suggests that education levels are more or less
perfectly correlated with innate ability, and it is this
which employers are rewarding. Following Spence
(1973), the concept of ‘signalling’ has come to be
associated with this idea. Education and qualifica-
tions are used to indicate attributes which are
independent of, though associated with, the skills
and content with which education is overtly con-
cerned. At their most extreme, signalling models
posit a situation in which the higher pay of the more
educated has nothing to do with academic or voca-
tional skills learned in education, but is entirely to do
either with schooling’s supposed or actual associa-
tion with innate ability, or its association with psy-
chological and personality traits, such as diligence.
Very few people would argue that returns to educa-
tion are entirely the result of its association with
higher ability: conversely, most people accept that
some of the apparent effects are indeed returns to
ability, not to ‘human capital formation’. Denison
(1964, p. 16), for example, notes his assumption that
three-fifths of the income differentials that appear, when
men of similar age are classified by years of education,
result from the effect of more education on the ability to
contribute to production; the remaining two-fifths reflect
the tendency for individuals of greater natural ability and
energy to continue their education, and that of other

variables that are associated with, but not the result of, the
amount of education. This three-fifths assumption . . .
enabled me to compute an index of the effect of increased
education on the ability of the average worker to contrib-
ute to production.
Any such calculation must include such an assump-
tion, whether or not it is basically a guess (as in
Denison’s own case) or based on empirical analy-
sis. Detailed work using longitudinal data-bases in
the UK and USA (see, for example, Murnane et al.,
1995; Blundell et al., 2003) has provided us with
increasingly sophisticated estimates of how far the
more educated are, at a given point in time, also
more intrinsically able and of how far that ability (as
measured by tests very early in life) affects later
earnings over and above the effects associated with
formal education and diplomas (Dearden et al.,
2002).
Analysts and policy-makers do not always ac-
knowledge or allow for the role of ability (Temple,
2001). It is critical that they should, since it indicates
how far the calculated benefits of the past and
present are replicable in the future, or are likely to be
far smaller. But it is also a ‘manageable’ issue, in the
sense that it does not undermine the assumption that
people are being paid their marginal product. One
can estimate the effects, and, therefore, separate
out—and extrapolate—those due to the ‘skill en-
hancement’ aspects of education.
The latter becomes much more problematic if, on
the other hand, wages and marginal product are not
associated. The assumption that they are—and that
one can therefore estimate quite precisely the eco-
nomic effects of additional education—has been
strongly criticized for quite as long as there have
been proponents of Denison-type models (see, for
example, Vaizey, 1962; OECD, 1964; Pritchett,
1996). This is not to say that people’s earned
incomes never have any relationship to their skills
and productivity. However, accepting some rela-
tionship (stronger or less strong for different groups
or societies) is very different from assuming the
relationship to be both general and direct enough to
allow precise estimation of education’s effects on
productivity.
2
As Margaret Stevens points out (personal communication; see also Stevens, 1999), if wages do not reflect marginal products,
it is quite as possible to underestimate as to overestimate the social returns to education. See Glewwe (1996) for a related argument.
A. Wolf
The point can be illustrated using everyone’s fa-
vourite occupational group, namely lawyers. Law-
yers are almost invariably the highest-earning occu-
pational group in Western societies, and a belief that
people are paid their marginal product surely implies
that we should be expanding the numbers of lawyers
as a major economic priority. I do not know anyone
who believes this, but once you start admitting that
earnings are not a good indicator of marginal prod-
uct for significant social groups, the whole case for
using earnings as an unbiased indicator for society
as a whole is surely at risk. More generally, we now
(in the West) live in societies where the proportion
of GDP which is spent by governments averages
close to half. Income distributions and individual
wages and salaries depend on a host of institutional
factors, over and above individual productivity.2
Many employees—notably in health and educa-
tion—have their salaries directly determined by
government policies, as do all civil servants, central
or local, and government-spending decisions (e.g.
on defence procurement, or legal aid) also have a
major impact on earnings in other sectors.
The dynamics of ‘signalling’ further complicate the
equation. Signalling theories are quite often dis-
cussed as though one had to choose between believ-
ing either that education has no effect whatsoever
on productivity, and that employers use education
purely as a signal of ability, or believing that educa-
tion-related differentials are all a result of ‘human
capital formation’. I have never met anyone who
held the former position (though, as we have seen,
a good number of people seem to hold the latter).
The labour-market evidence is, rather, consistent
with the co-existence of three processes.
First, education imparts new and valuable skills and
knowledge. It is also, second, correlated with under-
lying ability, and used, with some justification, by
employers as a proxy for this. Third, however,
education provides formal credentials. These may
be quite imperfectly associated with actual produc-
tivity, but important in the labour market in rationing
and controlling access to jobs and opportunities
because employers see them as a useful (though
admittedly imperfect) indicator. If credentials, as
319
OXFORD REVIEW OF ECONOMIC POLICY, VOL. 20, NO. 2
well as their holders’ actual (innate and acquired)
skills and abilities, affect future incomes, then peo-
ple have strong incentives to acquire yet more of
them, and, specifically, more than their contempo-
raries and competitors, even if they do not actually
increase their potential productivity much in the
process (see, for example, Collins, 1979; Wolf,
2002a; Sianesi, 2003).
It is extremely hard to estimate the extent to which
formal education, when it affects earnings, does so
via genuine skill acquisition, and how far credential-
holders benefit at the expense of other people who
might perform just as well. However, both factors
appear significant (Jenkins and Wolf, forthcoming).
For example, in the USA, high-school drop-outs, and
adult immigrants, may obtain a high-school diploma
equivalent in the form of the GED (General Educa-
tional Development) certificate and, indeed, almost
half a million a year now do. Labour-market data
show clearly that the certificate does have value, but
less than a ‘normal’ high-school diploma, and that
this is best explained not in terms of differences in
the cognitive skills associated with the two diplomas,
but by employers using the diplomas as signals not
merely of skills but also of attitudes and likely work
ethic (see, especially, Cameron and Heckman, 1993;
Murnane et al., 1999).
The main conclusion must be that, while (almost)
nobody would deny that education creates ‘human
capital’, the relationship between this and what
happens in the labour market, or the real economy,
is far more complex than a simple input–output
model implies, and not susceptible to precise estima-
tion. One can easily imagine credentialist pressures
leading many young people to acquire ever higher-
level qualifications and, in the process, skills which
are of little interest to employers, who do, however,
want workers who have mastered, to a high level,
skills taught earlier in the educational process. Since
those who do well earlier are also most likely to
acquire higher qualifications, it is to these latter—
probably degrees—that high returns will appear to
accrue, because their holders will be employers’
choice. A government which assumes that returns
to education are bound to be accurate signals of
individual productivity, or of future returns to more
of the same, is likely to make seriously bad deci-
sions.
320
III. COUNTRY COMPARISONS
The previous section criticized the idea that we can
routinely link specific amounts of an educational
input (years of education or particular diplomas) to
specific amounts of an output (GDP). However, this
does not mean that (all or some) education is
irrelevant to workers’ productivity, or to helping the
economy grow. If the empirical evidence suggests
a strong relationship in practice between levels of
education and levels of GDP, or between educa-
tional expansion policies and growth, then the theo-
retical problems raised above may be judged rela-
tively unimportant, and governments’ enthusiasm
for education vindicated. This section of the paper
therefore summarizes key empirical evidence, first
at the between-country level, and then within coun-
try.
(i) Country Comparisons
If countries which are broadly similar in other
respects have different growth rates and different
education policies, it is very tempting to see one as
the direct cause of the other. Governments certainly
do it all the time, especially in response to the
international surveys of comparative achievement
which have become such an established part of the
education scene—notably the IEA’s international
maths and science surveys or the OECD’s PISA
studies of teenagers’ attainment and its surveys of
adult literacy (see, for example, OECD, 1995, 2001;
Ruddock, 2000).
In any country which does badly, or simply less well
than expected, politicians and the media tend imme-
diately to compare their country with others which
have done better and are, at the time, economically
successful. They then call for, or, indeed, imple-
ment, education reforms which will move them
closer to the ‘winning’ systems. Recent examples
include making English primary school mathematics
more like that of Germany and Japan, in the wake of
the Third International Maths and Science Survey
results; while, more recently, the German Chancel-
lor’s declaration of a national educational emer-
gency was a response to PISA results in which
German teenagers trailed Scandinavian (and, in-
deed, British) students. In other words, people start
with and from the consensual opinion that education
 A. Wolf

matters critically for the economy and choose their
role models and reforms accordingly.
The research literature, however, attempts to iso-
late the impact of education on countries’ economic
performance using large data-sets (covering from
58 to 91 countries) rather than carefully selected
comparators. Indeed, Krueger and Lindahl remark
on the veritable ‘Tsunami of cross-country regres-
sion studies threatening to wash us all away’
(Krueger and Lindahl, 1999, p. 15).
The most striking feature of these studies is the
marked absence of any clear education effects. For
something which is supposedly so obvious, and so
powerful, a promoter of economic well-being and
growth, it is extraordinary how many studies find no
relationship between increases in schooling levels
and growth.3 Indeed, some studies, based on exten-
sive data-sets, actually find a negative relation-
ship—see, for example, Lau et al. (1991); Benhabib
and Spiegel (1994); and Pritchett (1996) for results
based on different sets of estimates.
For those of us who believe that education can
increase people’s productivity, even if it does not
always do so, this is disconcerting. It seems to
suggest that the strong relationship between educa-
tion and individual earnings, which has been main-
tained within countries as average education levels
rise, may indeed have most to do with signalling, or
spiralling credentialism, or indicate that many edu-
cated people occupy jobs which are well paid but for
reasons which have little to do with high marginal
products.
Krueger and Lindahl (1999) argue, in response to
these findings, that measurement error is likely to be
very important in international comparisons of this
type, and that, in much of the data, there is actually
more noise than signal. On that reasoning, and by
making changes to their model in response, they
obtain results in which the effect of changes in
schooling on growth appears as positive. This is
reassuring, since the idea that increases in schooling
might actually reduce growth is profoundly anti-
intuitive. None the less, their work also confirms
how extremely sensitive results are to model speci-
fications, and that some apparently ‘obvious’ rela-
tionships between education variables and growth
are no such thing.4
Overall, as an endorsement of the idea that expand-
ing educational provision is a sure-fire way of
delivering growth, these studies at best come closer
to one hand clapping than to any sort of ovation.
They are also, inevitably, limited by the simple and
restricted nature of their variables (physical capital
stock, years of education). Cross-country compari-
sons of a more detailed and institutional sort may
clarify whether, how, and when education is able to
improve economic performance.
The developed world
Much of the academic literature on education,
training, and growth argues for the central impor-
tance of the first two for the last, and, as such, has
had a major influence on the policy environment.
This has been especially true in the UK, where, in
the latter decades of the twentieth century, the
British élite became increasingly convinced that its
economy was failing because its education system
was failing, too (see, for example, Barnett, 1986).
Particular attention has been paid to the ‘Asian
tiger’ economies and to Germany (see, for example,
Finegold and Soskice, 1988; Ashton and Green,
1996; Crouch et al., 1999; Brown et al., 2001). The
history of some of the ‘Asian tigers’ is a particular
favourite for those wishing to make a case not only
for the importance of education generally but also
for the role of government in directing it. For
example, the government of Korea, where annual
growth in real wages averaged around 7 per cent
throughout the 1960s and 1970s, ran a massive
national literacy campaign immediately after the
end of the Second World War, then expanded
secondary schooling, and then vocational high schools

3
Krueger and Lindahl (1999) and Temple (2001) provide excellent overviews of the literature and of the methodological issues
associated with different studies and results.
4
The key adjustment which they make in response to presumed (and highly probable) measurement error is to constrain the
coefficient on capital growth (p. 19). With this reduced, the coefficient on schooling change rises. The authors find that initial levels
of education do not appear, in their models, to have any effect on economic growth among OECD countries: a finding which is
itself both surprising and at odds with governments’ belief in the need to ensure high levels of education today as a spring-board
for survival, let alone success, in the ‘knowledge economy’ of the future.

321
OXFORD REVIEW OF ECONOMIC POLICY, VOL. 20, NO. 2

and technical universities, even though parents
wanted their children to attend general and aca-
demic programmes.
It is hard to believe that Korea’s education policies
did not help its post-war success, and the same is
true of, for example, the symbiotic relationship
between Germany’s Dual System for apprentice-
ship, and the success of its manufacturing sector,
which continues to contribute an unusually high
share of GDP for a developed country (see, for
example, Soskice, 1994; Culpepper, 1999; Dore,
2000). But it does not follow that education and
training policy were the major and critical factors
even in these countries’ economic growth patterns
(as compared to, say, the Erhard economic re-
forms in Germany, which unleashed the 1950s
economic miracle). At present, Germany is, in its
turn, looking to education to solve its economic
problems. Its own history, as well as that of others,
counsels caution.
Among the successful post-war economies, exam-
ples where governments took highly interventionist,
manpower-planning-related approaches to educa-
tion (such as Korea) can be matched by others
(such as Hong Kong) where they did not. There is
no obvious relationship, within the wealthy OECD,
between university enrolment rates and income per
head: Switzerland, notably, has held out most firmly
against huge increases in university enrolments,
while retaining its position as the richest of the non-
oil states.5 The quality of America’s education
system has been castigated at home for decades,
(see, for example, National Commission, 1983): the
country consistently does badly in international com-
parative surveys, and until the innovation-based
boom of the 1990s, it figured prominently in institu-
tion-based analyses as an example of how not to
‘educate for growth’.
‘failure’. Owen (1999), in his account of the decline
and revival of British industry since 1945, concludes
that in only one of the sectors that he studies does
training seem to have been of major importance to
decline (or revival). Finally, if schoolchildren’s rela-
tive performance were really so significant, one
would expect at least some correlation between
international survey results in one decade and eco-
nomic performance some way down the line. Yet,
as Robinson (1999) has demonstrated, no such link
exists: there is no correlation whatsoever between
teenagers’ performance on international surveys of
attainment and economic performance in the fol-
lowing decades.
Developing countries
Comparative analyses which focus on the develop-
ing world confirm the absence of any simple rela-
tionships but also provide indications of why asso-
ciations between education and growth are so elu-
sive. A number of authors (e.g. Thomas and Wang,
1996; Lopez et al., 1998) emphasize the importance
of other policies such as openness to trade, and
argue that education and these other policies inter-
act. Only when the economic policy environment is
appropriate can education promote growth, allow-
ing skills (human capital) to be brought to bear
effectively.
Certainly, developing countries provide vivid exam-
ples of how to combine high levels of expenditure on
education with low levels of economic output. Those
which spent the most on expanding education in the
mid- to late twentieth century seem also to have
been disproportionately likely to believe in man-
power and other forms of central planning, to pour
large sums of money into loss-making state enter-
prises, and to expand state bureaucracies in order to
create jobs for otherwise unemployed graduates
from their expanding universities.6

The UK’s own economic revival in the last 20 years Studies of developing countries also illustrate how
has involved a work-force, the vast majority of easily education can become a process of intense
whom were educated in the years of educational competition for credentials and, at one and the same
5
It is important to distinguish between different forms of post-secondary education when comparing ‘tertiary’ enrolment figures,
as presented by, for example, OECD or EU summary tables. Switzerland has, by OECD standards, a very low enrolment rate in
universities, but has a highly developed system of post-school apprenticeship and higher vocational training.
6
Examples include Egypt and Sri Lanka. The former for many years had a policy of rapid expansion of, first, upper-secondary
and then tertiary education. Relatively highly paid jobs in the state bureaucracy were then created to soak up the numbers of
unemployed graduates who might otherwise threaten social stability (creating continuing strong demand for university places among
the population for whom education did indeed offer high returns). In Sri Lanka the situation has been similar, with higher education
operating primarily as a route into government jobs, for which there is intense competition exacerbated by ethnic tensions.

322

time, extremely unlikely to develop the type of skills
which enhance productivity. Dore’s work, in par-
ticular, has illustrated how commonly formal educa-
tion becomes a process of rote learning, through
which the children who are academically most able
and determined compete for scarce white-collar,
public-sector jobs (Dore, 1976, 1997; see also Little,
1997).
(ii) Family Matters: A Dynamic Relationship
In general, the empirical data suggest that relying on
education to promote economic growth is only too
likely to create as many problems as it solves, by
generating spiralling credentialism . In fact, one can
advance an even stronger criticism of governments’
current infatuation with education as a policy tool:
namely that, if governments get their other eco-
nomic policies right, education will largely take care
of itself.
This is because growth generates education as
much as vice versa . The relationship is dynamic and
two-way. In a growing economy, governments do
not need to persuade and chivvy citizens to get
educated. Most will do so anyway, for good per-
sonal reasons; though, of course, the more cheaply
education is offered, the more they will choose to
acquire.7
This two-way relationship derives from the obvious
benefits of education to individuals, in the form of
better career chances and higher incomes, plus the
universal tendency of parents to further their chil-
dren’s welfare. Moreover, as I and others have
argued at length elsewhere (see, for example, Frank
and Cook, 1995; Wolf, 2002a; Stevens, 2004), the
higher the level of formal qualifications in a society,
the riskier it becomes for oneself or one’s children
to be unqualified. So while it may be true in some
general sense that education fosters growth, it is
certainly true, in a very specific sense, that growth
creates education. As families obtain extra income,
the overwhelming majority seek good schools for
their children, press them to obtain qualifications,
and crowd into expanded institutions at ever higher
7
There may be problems with the provision of particular specialized skills, where government intervention is necessary.
However, much current government policy is about generating more and more education at a very general level—which is not where
supply problems are at all likely.
A. Wolf
levels. It is after the enormous economic successes
of the 1970s and 1980s that Hong Kong children
start out-performing their English counterparts, as
they compete for jobs which are increasingly pro-
fessional-level, and accessible through formal quali-
fications.
Bils and Klenow (1998) offer an ingenious empirical
method of estimating the extent to which growth
generates education or education growth. The basic
argument for why ‘education leads to growth’ is that
education increases productivity and so the edu-
cated have higher wages. However, workers also
tend to earn more as they build up time, and skills, on
the job: we can call it an ‘experience premium’.
In most countries, over recent decades, the average
duration of education for young workers has in-
creased markedly compared to their older work-
mates. If all this additional education has really
increased their productivity, both immediately (since
they have less to learn when they start work) and in
the longer term (because they learn faster and more
thoroughly), then wage statistics should reflect this.
Over time, we should find that the experience
premium declines. Highly educated young workers
should get paid more on entry than the previous
generation did, but less of an ‘experience premium’
because they have less to learn. And those countries
with the most rapidly narrowing premiums should be
the fastest growing, reflecting the benefit of their
educated young workers.
None of these patterns can be found and the breadth
or narrowness of the ‘experience’ bonus in work-
ers’ wages seems to bear no relationship to growth
rates. If high-quality schooling is making any differ-
ence to the relative economic performance of coun-
tries, it is doing so in a very undramatic fashion, since
(once again) its effects appear to be swamped or
neutralized by other factors. What Bils and Klenow’s
results do confirm, however, is that, while schooling
may not have much obvious impact on growth, fast-
growing economies do encourage further increases
in schooling. Growth generates education, whether
or not education generates growth.
323
OXFORD REVIEW OF ECONOMIC POLICY, VOL. 20, NO. 2

Table 1
Qualifications in the UK Work-force: Demand and Supply

Level of % citing this Total No. of jobs Total No. of individuals

highest qualification level, 2001 in Britain requiring aged 20–60 possessing
required to perform this level of qualification, qualifications at this level
respondent’s job 2001, ‘000s (but no higher), 2001, ‘000s

Level 4 or above: 29.2 7,122 7,359

Level 3 16.3 3,976 6,379
Level 2 15.9 3,878 5,302
Level 1 12.1 2,951 3,549
No qualifications 26.5 6,464 2,881

Source: Felstead et al. (2002). The figures are derived from the 2001 Skills Survey and the 2001 Labour
Force Survey; for a detailed discussion, see, especially, the notes to Tables 4.1 and 4.5 in Felstead et al.
In addition, studies consistently find that many jobs
which were once open to non-graduates are now
‘graduate entry’, even though their nature has not
changed. ‘Over-education’, in the sense that many
people hold higher levels of formal education than
necessary for the job they do, is a common phenom-
enon in both the developed and the developing world
(see, for example, Murphy 1993; Alpin et al., 1998).
Table 1 illustrates this graphically for the UK. The
figures compare the numbers of jobs requiring a
given level of formal qualification (based on incum-
bents’ own analysis) with numbers in the work-
force possessing that level. In every category but
one there is a clear surplus of individuals with the
required level of qualification over the number of
jobs which require skills at this level. The one
exception is jobs for which no formal qualification is
required at all—six and a half million of those
compared to less than three million workers without
formal qualifications.
So while it may be true in some general sense that
given levels of economic output and development
require certain overall levels of human capital in the
work-force, securing these is the least of govern-
ment’s worries. In any twenty-first-century coun-
try, rich or poor, parents and children will ensure that
the demand for ‘enough’ education is present, and
the more wealth there is (from previous growth) and
the wealthier people are, the more important quali-
fications become. While, over time, a modern
economy may need ever-higher levels of human
capital, at any given instant it is extremely unlikely
that a major constraint on growth is inadequate
demand for (or, indeed, total, private plus public,
spending on) education.
The quality of supply is, of course, a quite independ-
ent issue, where governments have a great deal of
influence. Unfortunately, simplistic policies have, in
important respects, tended to undermine rather than
advance quality. Before I describe how (in section
IV), the next section provides a brief survey of
research which sheds light on ways in which educa-
tion may, indeed, help to raise the marginal products
of the educated.
(iii) When does Education ‘Work’?
Formal education is a major source of human capi-
tal, but cross-country evidence indicates that it is no
magic bullet, and that whether (and how much)
education increases its recipients’ marginal product
will depend, critically, on the general economic and
policy environment. It also depends on what that
education involves. At the within-country level, we
can obtain some indications of what sort of educa-
tion ‘matters’ economically, from rate-of-return
analyses for a few unusually rich databases, studies
of individual firms, and research on technical inno-
vation.
Summarized very briefly, three important messages
emerge. First, there are cases where more educa-
tion does seem clearly associated with higher pro-

324

ductivity, but their nature differs between countries
and across time. For example, ‘natural experi-
ments’, such as an increase in the school-leaving
age, show that young people with more education
earn more than their immediate predecessors within
a similar job market, presumably because of their
higher skills (Meghir and Palme, 1999).8 Glewwe
was able to use a rich Ghanaian data set, including
independent measures of workers’ ability and at-
tainment, and to establish not simply that there
appears to be credentialism in the public sector,
along with more general problems of selectivity bias,
but also, and most importantly, that school quality
had declined over time. Falling rates of return to
primary education, he argued, should not be taken to
mean that money should be redirected away from it;
on the contrary, more should be spent to restore
quality and increase returns (Glewwe, 1996, p. 284).
Jones’s work, also in Ghana (Jones, 2001), indicated
that, in factories there, more-educated workers
were indeed more productive, and paid accordingly
(although she was not able to control for prior
ability). However, Weiss’s study of manufacturing
in the USA (again with no prior ability controls)
found that high-school graduates were no more
productive on a day-by-day basis than high-school
drop-outs, but did have better attendance levels
(Weiss, 1984). So, again, education may increase
productivity—but not always.
Second, a growing body of evidence points to the
importance of quantitative/mathematical skills in
developed economies. For example, in the UK,
workers with A-level maths (i.e. who took ad-
vanced/specialist maths in upper secondary school)
earn significantly more than their peers, even after
controlling for a host of factors, including general
levels of education and childhood ability/achieve-
ment measures. This effect only becomes evident
after several years in the labour market, so cannot
be the result of employers using maths as a signal of
higher ability at the time of labour-market entry
(Dolton and Vignoles, 2000). In the USA, the
importance of mathematics attainment, compared
to other educational and attainment measures has
been increasing steadily in recent years (Murnane
8
However, qualifications which certify acquisition of particular substantive and apparently valued skills may lose their labour-
market value quite rapidly during periods of educational expansion, as has happened with some English ones, notably lower-level
academic (GCSE) certificates. This suggests that credentialism can also cut in quite fast (Sianesi, 2003).
A. Wolf
et al., 1995). And detailed qualitative studies of a
variety of occupational sectors (see, especially,
Hoyles et al., 2002) find that mathematical and
quantitative skills have become increasingly impor-
tant in a wider range of jobs, largely because of the
increasing importance of IT, and the opportunities it
offers for data generation and analysis.
Third, and finally, the economic importance of both
a sizeable output of innovative research, and the
symbiotic relationship between a country’s suc-
cessful industries and its universities are well at-
tested: especially for countries which are already
rich, rather than catching up with the developed
world. The strength of countries in various different
sectors (e.g. pharmaceuticals, chemicals, software
engineering) is closely related to the areas in which
they possess centres of university excellence (e.g.
Porter et al., 2000). Similarly, while not all ‘clusters’
of excellence involve business with universities or
even technical institutes—some of the Italian clus-
ters of small, successful craft-based manufacturers
provide a counter-example (Kay, 1993)—in other
industries, such clusters do, indeed, seem to be both
extraordinarily productive, with clearly discernible
spillovers related to geographic location (see, for
example, Audretsch et al., 2003), and access to both
knowledge and high-quality employees.
IV. EDUCATING FOR THE ECONOMY:
SIMPLISTIC THEORIES AND
THEIR POLICY IMPACT
I have argued above that the idea that increasing
education levels is an effective policy tool for in-
creasing output rests on assumptions and interpre-
tations of data that are highly questionable. But does
this matter? In countries where governments are
relatively uninterested in education, public (or rather
parental) demand is pretty much guaranteed to keep
education levels rising alongside prosperity . Con-
versely, if other governments have a strong faith in
education for growth, and spend more as a result,
one can surely expect that the economy will not
actually suffer and, if other things go right, may be
able to benefit.
325
OXFORD REVIEW OF ECONOMIC POLICY, VOL. 20, NO. 2

This would be a comforting conclusion, but of process for as long as possible. The more years
course, the levels of spending which go into educa- each person spends in formal education, the more
tion and the quality of educational output are by no teachers are needed, and the more downward
means the same thing. This section argues that the pressure there is likely to be on teachers’ salaries.
current policy consensus can have serious adverse Given both existing acute teacher shortages in key
effects on the quality of education, using recent UK subjects such as maths and science (Smith, 2004),
government policy as an example. and the likelihood that average teacher quality has
been declining in recent years as relative salaries
In discussing the origins of current ideas, in the and conditions deteriorate (Eide et al., this issue),
growth and human-capital literature of the 1960s, the risks as well as the benefits of chasing increases
section II flagged as important the fact that the in ‘education-years’ should at least be addressed.
measure of education used in ‘studying education, The presumption that any additional year of educa-
economic performance and growth, is a very simple tion must yield positive economic benefits is a
one: namely, years of formal education completed’. powerful barrier to such an appraisal.
In academic analysis, this is done in large part
because other more substantive measures are absent; The formal growth literature does, of course, ac-
none the less, it is accepted as a reasonably good proxy knowledge that years of schooling are an imperfect
for actual learning and skill enhancement. measure: in Denison’s celebrated list of ways to add
one percentage point to the growth rate, his recom-
Because so much of the discussion of returns to mendation is to ‘Add one-and-a-half years to the
education is in terms of years of schooling, and average time that would . . . be spent in school . . .
because international statistics (whether from the or make an equivalent improvement in the qual-
EU, OECD, or UNESCO) also take that form, it is ity of education’ (Denison, 1964, p. 21, italics
hardly surprising that governments do likewise. In mine). Moreover, there is one potentially more
the UK, current governmental efforts to increase satisfactory measure of quality available, namely
the proportions of the age cohort staying in full-time qualifications acquired. North America has rather
education to age 18 are fuelled by comparisons with few of these at sub-baccalaureate level, but most
other European countries and take it as given that other developed countries have a wide range of
this will increase the skills of the additional students formal, national qualifications and diplomas which
and the skill ‘stock’ of the nation. In a recent are generally administered, or, at the least, heavily
memorandum to the House of Commons Education regulated, by the state (Wolf, 2002b).
and Skills Select Committee, holding hearings on
14–19 education and training, the Department for In the last 20 years, British education policy has
Education and Skills identified increasing staying-on been even more occupied with increasing qualifica-
rates as a top priority: a major reason being that the tion numbers than with increasing staying-on rates,
UK ranks ‘27th out of 30 among developed nations and it might seem that I have, therefore, been unduly
for participation of 17 year olds in education and critical of policy. Qualifications should, in theory, be
training’ (DfES, 2004). able to provide an objective measure of skills ac-
quired, and so of potential productivity gains. How-
Of course, it is perfectly possible that 17-year-olds ever, here, too, simplistic policy formulations have
will learn useful and productive skills by staying in distorted educational provision.
education, but the general mind-set is a curious one.
In most industries, one tries to reach a substantive The education targets9 which first became impor-
outcome quickly and efficiently, not extend the tant in the early 1990s encapsulate the problem.
9
Government’s growing preoccupation with the economic functions of education has, in the UK, developed alongside centralization
of control and the advent of a public-sector-wide accountability culture built around targets, league tables, audit trails, and the like (Power,
1997). It can be difficult to disentangle these different influences, but the qualification targets which have such a major influence on
the nature and conduct of British education certainly have their primary origin in beliefs about what the economy ‘needs’ from education.
The most important piece of education legislation in recent decades was the 1988 Education Reform Act, which established a national
curriculum for children aged 5–16 and a system of national tests at ages 7, 11, and 14 (respectively the ends of ‘Key Stages 1, 2, and
3’ of compulsory schooling). Published league tables, compiled by government, show the comparative performance of individual schools
and of local education authorities on these tests, and also at GSCE (General Certificate of Secondary Education—graded public
examinations taken at age 16) and A level (academic graded public examinations taken at age 18).

326

They were originally inspired by the CBI (Confed-
eration of British Industry), a strong advocate of
building up human capital as an effective ‘supply-
side’ approach to boosting productivity and growth.
In a well-publicized task-force report of 1989 (To-
wards a Skills Revolution), the CBI argued that ‘it
is necessary to set world class [qualification] targets
. . . [which] will have to be reviewed and raised until
the United Kingdom is on a par with its main
competitors’ (CBI, 1989, p. 19). It also (CBI, 1994)
argued strongly for continuing expansion of higher
education and a 50 per cent participation target.
The CBI was highly influential with the Conserva-
tive governments of the late 1980s and early 1990s
(Wolf, 2002a), which were determined to make the
education system more vocationally relevant and
were strong believers in education’s relevance to
and effects on growth (see, for example, DES,
1991). ‘National Education and Training Targets’
were introduced in 1991 and progress towards
meeting them became and remains central to the
way that government reviews and conducts its own
programmes and, therefore, to the success and
behaviour of public-sector employees, whether DfES
officials reporting to the Treasury and Downing
Street, further education college principals, small
training ‘providers’, or part-time teaching staff. The
rationale was summarized by the CBI in a pamphlet
welcoming the targets’ arrival: ‘The primary source
of competitive advantage lies in investing in people.
The UK cannot afford to debate this issue, it must
believe it’ (CBI, 1991, pp. 7–8).
The Labour government, which took over in 1997,
fully shares its predecessors’ view of the impor-
tance of human capital and the desirability of tar-
gets. One of its first actions was to set up a ‘National
Skills Task Force’ which argued the case for skills
as a way of improving UK productivity (compared
unfavourably with the USA, France, and Germany),
and the importance of policies to ‘attain . . . skills
appropriate for the knowledge economy of tomor-
row’ (National Skills Task Force, 2000, p. 13). It
also recommended some additional targets as an
important way of securing this goal.
10
The ‘expected standard’ is a level in the National Curriculum, which defines all subjects in relation to 10 levels. While these
were not originally meant to be age-related, in practice they were defined in terms of what it was thought an average child at a given
stage might achieve. The ‘expected’ level for 11-year-olds was thus originally conceived as the median level for that age. Eleven-
year-olds’ attainment on National Curriculum tests in maths, English, and science is the basis for primary-school league tables.
A. Wolf
Table 2 summarizes different formulations of the
overall National Education and Training Targets
which drive education policy. The early ones were
expressed primarily in terms of National Vocational
Qualifications (NVQs), which were introduced in
the late 1980s with the intention of greatly increasing
both the relevance and the popularity of vocational
(as opposed to academic) qualifications. However,
during the 1990s, a ‘National Qualifications Frame-
work’ was introduced which classified all qualifica-
tions (including university ones) at one of five levels,
and later targets use these.
At present, all the existing 2002 targets remain as
given, but a number of new targets have been
added. They include:
• a 7 per cent reduction in the number of adults
not participating in learning;
• reducing by 40 per cent by 2010 the number of
adult workers currently without a level 2 quali-
fication;
• improving the basic skills of 1.8m adults be-
tween 2001 and 2007, with an intermediate
target of 750,000 by 2004;
• 80 per cent of 11-year-olds reaching the ex-
pected standard of literacy (level 4 as meas-
ured on official tests) for their age and 75 per
cent reaching the standard in numeracy;10
• 50 per cent of 16-year-olds getting 5 higher
grade GCSEs (or equivalent) and 95 per cent
obtaining at least 1 GCSE.
The decision to create a national framework was
almost inevitable, given the prior decision to adopt
quantitative targets and use them to steer policy.
With many thousands of different qualifications in
existence (often of a highly specialized nature),
some form of equivalence and categorization was
necessary. Even in the vocational field, where
NVQs had ‘levels’ from the start, hundreds of older
qualifications lived stubbornly on, as employers and
employees continued to use them in preference to
the new NVQs (Wolf, 1997). But the result of
creating the framework, and placing all existing
qualifications within it, was that qualifications of
327
OXFORD REVIEW OF ECONOMIC POLICY, VOL. 20, NO. 2

Table 2
The National Education and Training Targets: Successive Formulations

1991 1995 1998

By 1997, 80% of all young people By 2000, 85% of all young people By 2002, 50% of 16-year-olds
to reach NVQ2 or equivalent to achieve 5 GCSEs at grade C achieving 5 or more GCSEs at
or above, an Intermediate GNVQ grades A*–C and 95% achieving
or an NVQ2 1 or more GCSEs at grades A*–G

By 2000, 50% of young people to By 2000, 75% of young people to By 2002, 85% of 19-year-olds
reach NVQ3 or equivalent achieve level 2 competence in with a ‘level 2’ qualification.
communication, numeracy, and IT By 2002, 60% of 21-year-olds
by age 19; and 35% to achieve with a ‘level 3’ qualification
level 3 competence by age 21
By 2000, 60% of young people to
achieve 2 GCE A levels, an
Advanced GNVQ or an NVQ
level 3 by age 21

By 1996, all employees should No employee target No employee target

take part in training or
development activities

By 1996, 50% of the work-force
aiming for NVQs or units
towards them
By 2000, 50% of the work-force
qualified at least NVQ3
or equivalent
By 2000, 60% of the work-force No work-force target
qualified to NVQ level 3,
Advanced GNVQ or 2 GCE
A level standard
By 2000, 30% of the work-force
to have a qualification at
NVQ4 or above

No adult learning target No adult learning target By 2002, 50% of adults to have a
‘level 3’ qualification. By 2002, 28%
of adults with a ‘level 4’ qualification

very different types and labour-market value, be-
came ‘equivalent’ in the eyes of auditors, funders,
and policy-makers. This, in turn, created some
obvious incentives for providers of education and
training (including civil servants) to deliver the sim-
plest/cheapest/most accessible qualifications at a
given level rather than those most useful to the
economy (or the individual learner).
The effects of targets can be illustrated particularly
clearly in the further-education sector, which is the
main provider of post-16, non-university education
and training—see Mager et al. (2000) for a fuller
discussion. Funding in this sector is very largely tied
to the provision of formal qualifications, and ‘provid-
ers’ will often sign contracts with the funding bodies
which specify very precisely the numbers of quali-
fications of a particular type and level to be achieved.
For a period of time in the mid-1990s, a large part of
the funding for many courses was paid only if and
when the learner actually received the qualification
(‘output-related funding’). Most of the qualifica-
tions involved were vocational ones, with 100 per
cent internal assessment, carried out by the teachers/
providers concerned, with the predictable effects on
assessment quality. A number of high-profile scan-
dals highlighting the results of this policy meant that
the proportions were modified, but the basic princi-

328
 A. Wolf

ples still apply in large parts of the vocational
curriculum (Stanton, 1996; Mager et al., 2000).11
Funding formulae for further education are also
fine-tuned regularly to give colleges an incentive to
help meet particular high-profile targets (currently,
those for adult basic skills and for adult level-2
qualifications). These incentives are likely to be
very effective, given the sector’s chronic financial
problems, but they also give colleges a strong incen-
tive to direct potential students who might be able to
undertake harder courses towards easier ones which
lead to the relevant types of qualification, and, within
a Qualification Framework level, to provide courses
which it will be easy for students to pass.
The problems which this approach can generate are
especially evident at present in the area of adult
basic skills. Poor performance by British adults on
the ‘International Adult Literacy Survey’ (OECD,
1995) sparked a major inquiry and the ‘Skills for
Life’ initiative to improve adult skills. The strategy’s
dominant rationale is again economic: to increase
individuals’ incomes but also because ‘employ-
ers . . . cannot compete in a . . . knowledge-based
economy without a workforce able to add real value
at every level’ (DfES, 2001, p. 8).12 Extra money
has poured into the programme which is driven by
the target of ‘improving the basic skills of 1.8 million
adults between 2001 and 2007, with an intermediate
target of 750,000 by 2004’.
In practice, this is a target for numbers passing
multiple-choice basic skills tests (which test reading
and numeracy but not writing). The tests double up
as ‘key skills’ tests for 16–18-year-olds, in which
guise they also attract high levels of (qualification-
related) funding and are part of the study pro-
gramme of many 16–18-year-old students. The
Learning and Skills Council, which funds all post-16
programmes, logically enough treats all candidates
alike in its record-keeping—they are, after all, tak-
ing the same tests.13
It is, therefore, not surprising to discover that two-
thirds of learners on ‘adult basic skills’ courses,
taking the qualifications and counting towards the
targets, are actually aged 16–18 (NIESR, 2004).
There is also considerable anecdotal evidence that
students who wish to work towards GCSEs in maths
or English are being entered for basic skills tests at
level 2 without the college bending over itself to point
out the consequence, which is that they will have
then ‘used up’ their current entitlement to one free
level-2 qualification and must pay for their GCSE
course. From the government’s point of view, such
students have helped meet two targets (basic skills
and level 2); from the college’s, they have been
enrolled on high-earning courses; but level-2 basic
skills and GCSE are only notionally equivalent, and
their labour-market values, as well as their substan-
tive content, are far apart (Wolf and Jenkins, 2002;
Smith, 2004).
Distorting effects such as these are by now well
documented in a range of public-sector contexts and
increasingly well understood (see, especially, Power,
1997; Hanushek et al., 2002; Le Grand 2003). As
Charles Goodhart pointed out some years back, any
measure used for control purposes becomes unre-
liable; so if qualifications are used for monitoring and
funding, it is overwhelmingly likely that they will, in
the process, become less reliable as sources of
information on their holders’ skills.
However, targets are by no means unique to the
education sector; so do they really have anything to
do with the simplistic view of growth and education
criticized here? I would argue that they do. That
view is an important reason why key education
targets are simple quantities (levels of qualification,
years in education), and why politicians believe that
a continual ratcheting up of target numbers will bring
continued benefits.
In its most straightforward form, the basic equation
of orthodox growth theory posits that levels of

11
The Treasury’s flagship programme of Employer Training Pilots also ties funding to acquisition of formal level-2 qualifications,
reflecting the same conviction that this guarantees both relevant outputs and accountability; while intermediaries such as the Union
Learning Fund, which receives money to encourage workplace learning, also lay down specific targets for providers, including
qualification numbers.
12
The document also includes estimates of just how much money UK industry loses every year from workers’ poor skills. See
Ananiadou et al. (2003) for a discussion of these figures’ origin and robustness.
13
Anyone over 16 taking maths or English GCSE is also counted. As one Learning and Skills Council official observed, this was
a target ‘doomed to succeed’.

329
OXFORD REVIEW OF ECONOMIC POLICY, VOL. 20, NO. 2
output can be explained by levels of certain key
inputs, and raising the quantity of any one of those
will (other things being equal) raise total output:
Q = f (K, L, A, t),
where Q = total real output, K = total real capital
stock, L = total labour force employed, A = total land
in use, and t is time.
Of course, the equation can be and has been
amended (notably, in this context, to take account of
labour-force quality and technical progress). None
the less, it has also been enormously seductive in this
basic form, because it seems so simple and power-
ful. Scott (1989, 1998), for example, makes this point
forcibly, arguing that enormous expectations have
been loaded on to this one function,14 and that the way
it is expressed encourages people to equate growth
with the accumulating of discrete inputs, when, in fact,
growth and prosperity are deeply dependent not just on
quantities, but on how things are combined, and
rearranged, and interact. Most politicians do not
think of themselves as economists, but they do
respond to apparently straightforward ideas and
policies which they can implement, from the centre,
in a top-down, cumulative way. In the 1950s, it was
capital investment which politicians the world over
tried to encourage and accumulate; today it is labour
inputs, but the same mind-set prevails.
If you believe that growth is achieved by increasing
the volume of different inputs, then, as a govern-
ment, you are led inexorably towards a centralized,
target-setting approach to education. A logical out-
come is the setting of qualification targets, which
can be monitored, counted, classified, and projected
forward far more precisely than unaccredited learn-
ing with no clear audit trails. British further educa-
tion clearly demonstrates the result.15
V. CONCLUSIONS
The current political consensus concerning educa-
tion’s contribution to economic performance has
14
‘An apparent advantage of [this equation] is that it explains both the level of output at any given time and changes in that
level from one time to another. I question this quite staggering claim’ (Scott, 1998, p. 74, italics original).
15
Higher education offers plenty of other examples of these effects. The pursuit of student numbers, and the subconscious
equating of years enrolled and formal diplomas with substantive skills acquired is, not surprisingly, associated with a 20-year period
when per-student funding halved while the average number of ‘contact hours’ for students declined and class sizes increased.
16
I am indebted to Dieter Helm for making the point.
330
generated simplistic policies with substantial delete-
rious effects. How might matters be improved?
One important need is for policy-makers simply to
understand economic theory and evidence better.
They need, for example, to understand that quality
matters; that economists use years of education in
much of their work simply because it is the best
proxy available; but that if chasing quantity reduces
quality, societies can actually end up worse off than
before in terms of the human-capital formation they
seek. They might also remember that the growth
literature of the 1960s, from which they (often unwit-
tingly) draw inspiration, also emphasized the impor-
tance of technical progress: something which de-
pends critically on pockets of university and research
excellence rather than mass uniform provision.16
Most of all, governments need to abandon their love
affair with quantitative targets. This, however, will
be hard to achieve. These targets provide central
control in an apparently simple and clear way which
other policy levers cannot emulate. Contemporary
politicians, the world over, are highly enamoured of
education policy because it seems to offer a tool for
delivering prosperity, in an age when this is expected
of governments, and when their repertoire of plau-
sible instruments is limited. Expanding education
has the enormous advantage, moreover, that it is
politically almost cost-free. Everyone believes edu-
cation is a good thing; and there are no interest
groups who will be visibly harmed by expansion, or
will mobilize in opposition. Nor is there likely to be
clear evidence in the short term of failure or suc-
cess, other than reaching the targets themselves,
which is seen as self-evidently desirable.
So weaning politicians away from education targets
may be hard. The best hope, ironically, lies in the
financial crises which expansion itself generates.
As Barr (this issue) describes, the effects of univer-
sity expansion, financially and in their impact on
quality, have forced reforms which make students
responsible for an increased part of their costs, and
in the process will increase the importance of
student preferences over central planners’ deci-
 A. Wolf

sions. There is no reason in principle why other post-
compulsory students, in further education and adult
provision, should not operate under the same policy
regime; indeed, in financial terms, this would in-
crease the equity of the UK system overnight.
Students and their parents are far closer to the
relevant parts of the labour market, and far more
realistic about its demands, than central government
can ever be. Education is not only about economic
performance , but it does have a vital contribution to
make. It is far more likely to achieve its economic
potential the more decisions are spread among those
for whom quality matters, directly, rather than lodged
with those whose major incentive is to deliver the
numbers.

REFERENCES

Aldrich, R. (ed.) (2002), A Century of Education London, Routledge-Falmer.

Alpin, C., Shackleton, J. R., and Walsh, S. (1998), ‘Over- and Undereducation in the UK Graduate Labour Market’,
Studies in Higher Education, 23(1), 17–34.
Ananiadou, K., Jenkins, A., and Wolf, A. (2003), The Benefits to Employers of Raising Workplace Skill Levels: A
Review of the Literature, London, National Research and Development Centre for Adult Literacy and
Numeracy.
Ashton, D., and Green, F. (1996), Education, Training and the Global Economy, Cheltenham, Edward Elgar.
Audretsch, D., Kehmann, E., and Warning, S. (2003), ‘University Spillovers: Strategic Location and New Firm
Performance’, Centre for Economic Policy Research Discussion Paper 3837.
Barnett, C. (1986), The Audit of War: The Illusion and Reality of Britain as a Great Nation, London, Macmillan.
Becker, G. (1964), Human Capital, University of Chicago Press.
— (1993), Human Capital, University of Chicago Press, 3rd edn.
Benhabib, J., and Spiegel, M. (1994), ‘The Role of Human Capital in Economic Development: Evidence from Aggregate
Cross-country Data’, Journal of Monetary Economics, 34(14), 143–74.
Bils, M., and Klenow, P. J. (1998), Does Schooling Cause Growth or the Other Way Around?, Working Paper 6963,
Boston, MA, National Bureau of Economic Research.
Blundell, R., Dearden, L., and Sianesi, B. (2003), ‘Evaluating the Impact of Education on Earnings in the UK: Models,
Methods and Results from the NCDS’, Institute of Fiscal Studies Working Paper WO3/20.
Blunkett, D. (2000), ‘Modernising Higher Education—Facing the Global Challenge’, speech delivered at the University
of Greenwich, London, Department for Education and Employment, February.
Brown, G., and George, E. (2002), ‘A Lesson in Development’, Financial Times, 18 June.
Brown, P., Green, A., and Lauder, H. (eds) (2001), High Skills—Globalisation, Competitiveness, and Skill Formation,
Oxford, Oxford University Press.
Cameron, S. V., and Heckman, J. J. (1993), ‘Determinants of Young Male Schooling and Training Choices’, NBER
Working Papers 4327, National Bureau of Economic Research.
CBI (1989), Towards a Skills Revolution—A Youth Charter, interim report of the Vocational Education and Training
Task Force, London, Confederation of British Industry.
— (1991), World Class Targets, London, Confederation of British Industry.
— (1994), Thinking Ahead: Ensuring the Expansion of Higher Education into the 21st Century, London,
Confederation of British Industry.
CIHE (2003), The Impact of Higher Education, London, Council for Industry and Higher Education.
Collins, R. (1979), The Credential Society, New York, Academic Press.
Crouch, C., Finegold, D., and Sako, M. (1999), Are Skills the Answer? The Political Economy of Skill Creation in
Advanced Industrial Countries, Oxford, Oxford University Press.
Culpepper, P. D. (1999), ‘The Future of the High Skill Equilibrium in Germany’, Oxford Review of Economic Policy, 15(1),
43–59.
Dearden, L., McIntosh, S., Myck, M., and Vignoles, A. (2002), ‘The Returns to Academic, Vocational and Basic Skills
in Britain’, Bulletin of Economic Research, 54, 249–74.
Denison, E. F. (1962), ‘How to Raise the High-employment Growth Rate by One Percentage Point’, American Economic
Review Papers and Proceedings, May.

331
OXFORD REVIEW OF ECONOMIC POLICY, VOL. 20, NO. 2

Denison, E. F. (1964), ‘Measuring the Contribution of Education (and the Residual) to Economic Growth’, in OECD
Study Group, The Residual Factor and Economic Growth, Paris, Organization for Economic Cooperation and
Development, 13–55.
DES (1991), Education and Training for the 21st Century, London, Department for Education and Science.
DfES (2001), Skills for Life. The National Strategy for Improving Adult literacy and Numeracy Skills, London,
Department for Education and Skills.
— (2003), 21st Century Skills: Realising Our Potential, London, Department for Education and Skills.
— (2004), Memorandum to the Education and Skills Select Committee on 14–19 Education and Training,
London, Department for Education and Skills.
Dolton, P., and Vignoles, A. (2000), ‘The Pay-off to Mathematics A Level’, in C. Tikly and A. Wolf (eds), The Maths
We Need Now: Demands, Deficits and Remedies, London, Institute of Education.
Dore, R. (1976), The Diploma Disease: Education, Qualification and Development, London, George Allen & Unwin.
— (1997), The Diploma Disease: Education Qualification and Development, 2nd edn, London, Institute of
Education.
— (2000), Stock Market Capitalism. Welfare Capitalism: Japan and Germany versus the Anglo-Saxons, Oxford,
Oxford University Press.
Felstead, A, Gallie, D., and Green, F. (2002), Work Skills in Britain 1986–2001, DfES/SKOPE.
Finegold, D., and Soskice, D. (1988), ‘The Failure of Training in Britain: Analysis and Prescription’, Oxford Review of
Economic Policy, 4(3), 21–53.
Fitzgerald, G. (2004), ‘Why Do the English Fail to See the Real Worth of Study?’, Times Higher Education Supplement,
13 February.
Frank, R., and Cook, P. (1995), The Winner-Take-All Society, New York, The Free Press.
Glewwe, P. (1996), ‘The Relevance of Standard Estimates of Rates of Return to Schooling for Education Policy: A Critical
Assessment’, Journal of Development Economics, 51, 267–90.
Griliches, Z. (1997), ‘Education, Human Capital and Growth: A Personal Perspective’, Journal of Labor Economics,
15, S330–42.
Hanushek, E., Heckman, J., and Neal, D. (eds) (2002), ‘Designing Incentives to Promote Human Capital’, The Journal
of Human Resources, 37(4), special issue.
Hoyles, C., Wolf, A., Molyneux-Hodgson, S., and Kent, P. (2002), Mathematical Skills in the Workplace, Final Report
to the Science, Technology and Mathematics Council.
Jenkins, A., and Wolf, A. (forthcoming), ‘Employers’ Selection Decisions: The Role of Qualifications and Tests’, in
S. Machin and A. Vignoles (eds), The Economics of Education and Education Policy in the UK, Princeton,
NJ, Princeton University Press.
Jones, P. (2001), ‘Are Educated Workers Really More Productive?’, Journal of Development Economics, 64(1), 57–
79.
Kay, J. (1993), Foundations of Corporate Success, Oxford, Oxford University Press.
Krueger, A., and Lindhal, M. (1999), ‘Education for Growth in Sweden and the World’, NBER Working Paper 7190,
National Bureau of Economic Research.
Lau, L., Jamison, D., and Louat, F. C. (1991), Education and Productivity in Developing Countries: An Aggregate
Production Function Approach, Washington, DC, World Bank.
Le Grand, J. (2003), Motivation, Agency and Public Policy: Of Knights and Knaves, Pawns and Queens, Oxford, Oxford
University Press.
Little, A. (ed.) (1997), ‘The Diploma Disease’, Assessment in Education, 4(1) (special issue).
Lopez, R., Vinod, T., Wang, Y. (1998), ‘Addressing the Education Puzzle: The Distribution of Education and Economic
Reform’, Policy Research Working Paper 2031, Washington, DC, World Bank.
Mager, C., Robinson, P., Fletcher, M., Stanton, G., Perry, A., and Westwood, A. (2000), The New Learning Market,
London, Further Education Development Agency.
Meghir, C., and Palme, M. (1999), ‘Assessing the Effect of Schooling on Earnings Using a Social Experiment’, Stockholm
School of Economics Working Paper 313.
Murnane, R. J., Willett, J. B., and Levy, F. (1995), ‘The Growing Importance of Cognitive Skills in Wage Determination’,
Review of Economics and Statistics, 77, 251–66.
— — Tyler, J. H. (1999), ‘Who Benefits from Obtaining a GED? Evidence from High School and Beyond’, Working
Paper Series 7172, Cambridge, MA, National Bureau of Economic Research.
Murphy, J. (1993), ‘A Degree of Waste’, Oxford Review of Education, 19, 9–31.
National Commission on Excellence in Education (1983), A Nation at Risk, Washington, DC, US Department of
Education.

332
 A. Wolf

National Skills Task Force (2000), Skills for All: Proposals for a National Skills Agenda, London, Department for
Education and Employment.
NIESR (2004), Evaluation of the Basic Skills Programme: First Report, London, National Institute of Economic and
Social Research.
OECD (1964), The Residual Factor and Economic Growth, Paris, Organization for Economic Cooperation and
Development.
— (1995), Literacy, Economy and Society: Results of the First International Adult Literacy Survey, Paris,
Organization for Economic Cooperation and Development.
— (2001), Knowledge and Skills for Life: First Results of the OECD Programme for International Student
Assessment (PISA), Paris, Organization for Economic Cooperation and Development.
Owen, G. (1999), From Empire to Europe: The Decline and Revival of British Industry since the Second World War,
London, Harper Collins.
Porter, M. J., Hirotaka, T., and Mariko, S. (2000), Can Japan Compete?, Basingstoke, Macmillan.
Power, M. (1997), The Audit Society, Oxford, Oxford University Press.
Pritchett, L. (1996), ‘Where Has All the Education Gone?’, World Bank Policy Research Working Paper 1581,
Washington, DC, World Bank.
Psacharopoulos, G. (1985), ‘Returns to Education: A Further International Update and Implications’, Journal of Human
Resources, 20 (4).
Robinson, P. (1999), ‘Learning from Comparing: New Directions in Comparative Educational Research’, in R. Alexander,
P. Broadfoot, and D. Phillips (eds), Learning from Comparing: New Directions in Comparative Educational
Research, Vol. 1, Contexts, Classrooms and Outcomes, Oxford, Symposium.
Ruddock, G. (2000), Third International Maths and Science Study Repeat (TIMSS-R): First National Report,
Department for Employment and Education.
Scott, M. F. (1989, 1998), A New View of Economic Growth, Oxford, Oxford University Press.
Sianesi, B. (2003), ‘Returns to Education: A Non-technical Summary and Policy Discussion’, Institute for Fiscal Studies,
mimeo.
— Van Reenan, J. (2000), ‘The Returns to Education: A Review of the Macro-economic Literature’, Discussion
Paper No. 6, London, London School of Economics and Political Science, Centre for the Economics of Education.
Smith, A. (2004), Making Mathematics Count: The Report of the Post-14 Mathematics Inquiry, London, Department
for Education and Skills.
Soskice, D. (1994), ‘Reconciling Markets and Institutions: The German Apprenticeship System’, in L. Lynch (ed.),
Training and the Private Sector, Chicago, IL, University of Chicago Press.
Spence, A. M. (1973), ‘Job Market Signaling’, Quarterly Journal of Economics, 2(3), 355–74.
Stanton, G. (1996), Output-Related Funding and the Quality of Education and Training, London, ICRA, Institute
of Education.
Stevens, M. (1999), ‘Human Capital Theory and UK Vocational Training Policy’, Oxford Review of Economic Policy,
15(1), 16–32.
Stevens, R. (2004), University to Uni: The Politic of Higher Education in England since 1944, London, Politico’s.
Temple, J. (2001), ‘Growth Effects of Education and Social Capital in OECD Countries’, OECD Economic Studies,
Summer.
Thomas, V., and Wang, Y. (1996), ‘Distortions, Interventions and Productivity Growth: Is East Asia Different?’,
Economic Development and Cultural Change, 44(2), 265–88.
Vaizey, J. (1962), The Economics of Education, London, Faber.
Weiss, A. (1984), ‘Determinants of Quit Behavior’, Journal of Labor Economics, 2(3), 371–87.
Wolf, A. (1997), ‘Growth Stocks and Lemons: Diplomas in the English Market-place 1976–1996’, Assessment in
Education, 4(1), 33–49.
— (2002a), Does Education Matter? Myths about Education and Economic Growth, London, Penguin Press.
— (2002b), ‘Qualifications and Assessment’, in R. Aldrich (ed.), A Century of Education, London, Routledge-
Falmer.
— Jenkins, A. (2002), ‘The Growth of Psychometric Testing for Selection. Why has Test Use Increased, Will
Growth Continue, and What does this Mean for Education?’, CEE Discussion Paper No. 29, London, Centre
for the Economics of Education.

333