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Savings and education: a life-cycle model applied to a panel of 74 countries

Author

Listed:
  • Morisset, Jacques
  • Revoredo, Cesar

Abstract

The authors analyze how education contributes to savings. There are many reasons to believe that education and savings may be linked, either positively or negatively. It is generally expected that people with higher education will earn greater income, thereby leading to higher savings, even if the positive relationships between education and income andbetween income and savings take time to be completely realized. The relationship between education and income can be negative at first because education expenses initially increase consumption and reduce current disposable income. Another argument for a negative link concerns precautionary savings. If there is a precautionary motive for savings, education should reduce income volatility because educated people are less likely to be unemployed, or, if unemployed, they are covered by unemployment insurance. With less need for precautionay savings among the more educated, education and savings would be negatively correlated. The author's major findings for a panel of 74 countries over the period 1960-90 include the following views. Education positively influences savings in the long run. For each percentage point increase in education stock, the savings rate increases 0.37 percent. But it takes more than five years for the positive effect, through income, to compensate for the initial negative impact on savings. The lagged effect (five years) of a change in the stock of education appears positive in all regions except Latin America. The negative correlation in this region can be explained by the worsening quality of education, which reduces the ability to implement new technologies, and by the traditional focus on university education instead of primary and secondary education. Moreover, well-educated people in Latin America seem to have a lower precautionary motive for saving than in other regions. People are more productive, invest more, or are a better complement to physical capital in an environment where many people are well-educated. Accordingly, the positive effect of education on savings appears higher in industrial countries, given their higher initial stock of human capital, than in developing countries. The effects of primary and secondary education on savings are positive and significant in all regions, while the effects of university education is positive only in industrial countries. One explanation might be that industrial countries tend to invest in new projects rather than to adopt existing technology. The authors derive several policy recommendations from their conclusions. First, the positive effect of education on savings is enhanced by a reduction in the cost of education which automatically increases disposable income. In many countries, the unit cost of education may be reduced by exploiting economies of scale and by developing incentives for greater cost-consciousness among consumers and providers. Many education systems may need to upgrade their internal efficiency. Second, a focus on primary education should be encouraged, specifically in developing countries. The empirical results indicate that the positive long-run effect associated with primary education is twice as large as that for secondary and tertiary eduation. Latin America's traditional neglect of primary education contrasts sharply with the policy of Asian countries. Finally, it is important to increase the coverage of education, not only for equity but also for efficiency reasons. Indeed, how much a child learns is influenced by the nature of the learning environment, as supported by the role played by externalities and the intial level of education in the realtionship between eduation and savings.

Suggested Citation

  • Morisset, Jacques & Revoredo, Cesar, 1995. "Savings and education: a life-cycle model applied to a panel of 74 countries," Policy Research Working Paper Series 1504, The World Bank.
  • Handle: RePEc:wbk:wbrwps:1504
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    Citations

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    Cited by:

    1. María José Roa García & Diana Mejía (ed.), 2018. "Decisiones financieras de los hogares e inclusión financiera: evidencia para América Latina y el Caribe," Investigación Conjunta-Joint Research, Centro de Estudios Monetarios Latinoamericanos, CEMLA, edition 1, volume 1, number 7sp, December.
    2. Çağaçan DEĞER & Elif ERER, 2020. "Social Security Membership and Saving: The Turkish Case," Sosyoekonomi Journal, Sosyoekonomi Society, issue 28(43).
    3. Wang, Dong & Zhang, Qiqi & Yang, Jingya, 2022. "Higher education expansion and national savings level: Evidence from macro data," International Review of Economics & Finance, Elsevier, vol. 82(C), pages 92-103.
    4. Mumtaz Hussain & Oscar Brookins, 2001. "On the determinants of national saving: An extreme-bounds analysis," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 137(1), pages 150-174, March.
    5. Ana María Iregui-Bohórquez & Ligia Alba Melo-Becerra & María Teresa Ramírez-Giraldo & Ana María Tribín-Uribe, 2018. "Determinants of Formal and Informal Saving in Colombia," Investigación Conjunta-Joint Research, in: María José Roa García & Diana Mejía (ed.), Financial Decisions of Households and Financial Inclusion: Evidence for Latin America and the Caribbean, edition 1, volume 1, chapter 4, pages 95-123, Centro de Estudios Monetarios Latinoamericanos, CEMLA.
    6. Ana María Iregui-Bohórquez & Ligia Alba Melo-Becerra & María Teresa Ramírez-Giraldo & Ana María Tribín-Uribe, 2018. "Factores determinantes del ahorro formal e informal en Colombia," Investigación Conjunta-Joint Research, in: María José Roa García & Diana Mejía (ed.), Decisiones financieras de los hogares e inclusión financiera: evidencia para América Latina y el Caribe, edition 1, volume 1, chapter 4, pages 101-131, Centro de Estudios Monetarios Latinoamericanos, CEMLA.
    7. Fernández, Andrés & Martínez, Rodrigo, 2010. "Impacto social y económico del analfabetismo: modelo de análisis y estudio piloto," Documentos de Proyectos 3747, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
    8. Ana María Iregui-Bohórquez & Ligia Alba Melo-Becerra & María Teresa Ramírez-Giraldo & Ana María Tribín-Uribe, 2016. "Ahorro de los hogares de ingresos medios y bajos de las zonas urbana y rural en Colombia," Borradores de Economia 960, Banco de la Republica de Colombia.

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