fedgazette Roundup (2011-2015)

The economic impact of closing Minnesota's achievement gap: A theoretical construct

Rob Grunewald | Associate Economist
Dulguun Batbold | Research Analyst

Published April 12, 2013

An education achievement gap by race and income has long persisted in the nation and in Minnesota. While there is a clear moral argument for closing the gap, there are some compelling economic ones as well.

Differences in high school graduation rates and achievement scores between white students and Native American, black and Hispanic students in Minnesota are some of the largest in the country. The chart below shows a substantial difference in average math scores of white and black eighth grade students since 2003.

Achievement gap charts -- 4-12-13

If test scores of black and Latino students and low-income students could be raised to those of white and higher-income students, presumably graduation rates would increase, as would the overall skills of the workforce, leading to productivity gains and stronger economic growth. But by how much, and what net effect would it have for closing these gaps in Minnesota?

A 2009 McKinsey report, using a methodology developed by Eric Hanushek in a 2008 study in the Journal of Economic Literature, projects that national GDP in 2008 could have been 2 percent to 4 percent higher had the United States bridged the racial achievement gap by raising the performance of black and Latino students to that of white students by 1998 after a successful 15-year reform period. The report estimates that GDP could have been 3 percent to 5 percent higher had the United States closed the income achievement gap by raising the performance of students with household incomes below $25,000 to that of students with higher household incomes.

The same framework discussed in the McKinsey report was applied to Minnesota using National Assessment of Educational Progress (NAEP) data for the last five survey years. Closing the racial achievement gap for eighth grade students in Minnesota would improve the state’s overall average math scores by about 2 percent; closing the income achievement gap would improve average math scores by about 3 percent.

Using Hanushek’s estimate – that long-run GDP growth rate increases by 1.3 percentage points per standard deviation improvement in test scores (about 0.6 percentage points per 10 percent increase in average test scores) – closing the achievement gap in Minnesota would translate into a 0.1 to 0.3 percentage point increase in the long-run economic growth rate.

Even a small change in a growth rate over time adds up. For example, if a hypothetical 15-year reform plan could close the achievement gaps, the level of Minnesota’s GDP would diverge from trend, raising the GDP level by 1 percent or more after 30 years and by more than 3 percent to 6 percent after 50 years (see table below).

Achievement gap table -- 4-10-13

In terms of dollars, these increases translate to a few hundred million dollars per annum after 15 years from the start of the reform period to a couple of billion dollars after 30 years to more than $10 billion after 50 years. In 2011, Minnesota’s real GDP was $282 billion. However, caution should be used with these projections because it’s unclear whether Hanushek’s estimate applies at the state level.

The calculated economic impact of closing the achievement gap in Minnesota is smaller than the national estimates by McKinsey. One explanation is the lower percentage of black and Latino students in Minnesota (22 percent) relative to the national average (45 percent). Likewise, low-income students also comprise a smaller percent of population in Minnesota than in the nation.

Another explanation could be different assumptions used in McKinsey’s and Hanushek’s models. Although details are not clear, the McKinsey report seems to assume that after the 15-year reform period, the entire workforce achieves the projected gains in cognitive skills commensurate with the closing of the achievement gap in test scores. Hanushek’s paper assumes a more gradual displacement of the existing workforce with higher-quality graduates. Correspondingly, estimates for Minnesota using this assumption yield a smaller impact of bridging the gap.

Even if the economic impact of closing the gap is estimated to be smaller in Minnesota than nationally, it is by no means a trivial one. As anyone planning a retirement learns, small changes in growth rates can have a big impact on the future value of investments, more so for longer-term investments.

Furthermore, this analysis doesn’t take into account benefits to government from closing the achievement gap, such as reductions in remedial education and crime costs, and eventually higher tax revenue, nor does this analysis estimate the cost of a 15-year education reform. Both of these data points are needed to assess whether the government would achieve a positive rate of return from investing in education reform. An analysis by Henry Levin and colleagues suggests that investments in early childhood education and some reforms for school-age children do just that.

And, finally, this is not the only achievement gap whose closure would likely lead to faster economic growth. Nationally, for example, Asian students have the highest average test scores. If, hypothetically, educational reform could boost the performance of white students to the level of Asian students, overall average math scores would increase by about 2 percent, with about a 0.2 percentage point increase in economic growth. Furthermore, if test scores of all non-Asian students were raised to the average of Asian students, average math scores would increase by over 6 percent, with about a 0.6 percentage point increase in economic growth, almost 70 percent larger than the effect of closing the black-Hispanic and white achievement gap. This particular analysis, however, isn’t relevant to Minnesota, where average test scores for Asian students are lower than both Asian students nationwide and Minnesota white students.