How Education and Training Affect the Economy

As the labor supply increases, the wage rate experiences downward pressure. If demand for labor doesn’t keep up with the labor supply, then 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 carrying significant costs.

But 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 flourish while others falter.

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.

How Job Training Influences the Economy

A successful economy has a workforce capable of operating industries at a level where it holds a competitive advantage over the economies of other countries. Nations may try incentivizing training through tax breaks, providing facilities to train workers, or a variety of other means designed to create a more skilled workforce. While it’s unlikely that an economy will hold a competitive advantage in all industries, it can focus on several industries in which skilled professionals are more readily trained.

The Bottom Line

The knowledge and skills of workers available in the labor supply are key factors in determining both business and economic growth. Economies with a significant supply of skilled labor, brought on through formal education as well as vocational training, are often able to capitalize on this by developing more value-added industries, such as high-tech manufacturing.

Countries need to ensure through legislation and jobs programs that all of their citizens have access to the education and training that can lift up workers, companies, and the entire economy.