Estimating the social rate of return to education for Indigenous Australians

Abstract

This paper compares estimates of the social rate of return to education for Indigenous Australians with those for non-Indigenous Australians. The social rate of return measures the net benefits to society of educating its citizens. If education is treated as an investment by society in its people, then Australian society will be made better off by an increase in educational investment as long as the social rate of return is higher than that for other public investments. This paper provides a discussion of the concept of the social rate of return to education and some estimates for Indigenous Australians. Higher levels of education, in general, lead to an increased probability of finding employment and higher levels of income in employment. Hence, an increased level of education for an Indigenous person would be of advantage in economic terms; the private rate of return to education is likely to be quite high. In addition, we argue that increasing education has important social benefits (so-called 'externalities') for Indigenous people and society in general: improved education would lead to better nutrition, better living conditions, better access to health services, and hence a longer and healthier life. This means that productivity would be higher for Indigenous people and they would have higher incomes over a longer period of time. In addition, we argue that improved levels of education have the capacity to contribute to a decrease in the numbers of Indigenous people who are imprisoned, and thus lead to a direct reduction in the costs of imprisonment. Thus, increased education increases the earnings span, decreases prison costs and hence increases the social rate of return. We find that the social rate of return for education is generally higher for Indigenous Australians than for non-Indigenous Australians. This suggests, from a public policy perspective, that government should allocate increased funding for the education of Indigenous people since this social rate of return is greater than the Department of Finance recommended cut-off rates for government investment projects. Show more