What Do We Earn from Knowing More Languages? Insights from Economics for Language Policy ‘Future of Language Teaching at University’ Conference Dundee University 4th April 2011 James Foreman-Peck Welsh Institute for Research in Economics and Development Cardiff Business School

What are the returns to investment in language acquisition? Incomplete knowledge of national languages an obstacle to trade and so to economic prosperity. Investment in language acquisition absorbs time and money But economic advantages that create scope for public policy. European Commission’s Lisbon Strategy (2000) identified language skills as vital to boosting the competitiveness of Europe’s economy. Do market forces create adequate language investment?

Possible Sources of Market Failure Social returns > private returns? Network effects of language; my investment benefits you, but I ignore that (smaller language populations more incentive than larger to invest) Costs of language acquisition (when young) low relative to other skills – but no judgement or resources? Complementarities between language (general) skills and firm-specific skills and assets + free labour Information failure about possibilities in foreign language markets Likely to be greatest for smaller businesses, with less resources to invest in search

Language Skills and Productivity Increase Language Skills (General Skill) Exports Productivity Increase Firm- Specific Skills + Information on foreign markets

Three approaches to measuring the economic impact of language investment 1. Individuals’ earnings – no good with market failure 2. SME export performance (but in the study discussed below we don’t have non-exporters who might export with language skills) 3. National trade- trade/GDP ratio UK = 55 percent

Returns to language degrees The data from a study by Ian Walker (Lancaster) of the returns to degrees by subjects allows inspection of degrees of graduates in the presumably high earning Finance sector The largest subject category 17.46% were Economics and Management, Classics and Languages accounted for 1.83% of the total % were non-graduates So 30% of graduates in Finance studied Economics and Management and 3% of graduates studied Classics and Languages. In the larger Education sector we find more classics and languages and fewer Economics and Management graduates. Consequently earnings of the two groups would diverge because of this sectoral distribution. But what should we infer?

Distribution between employment sectors of language graduates (compared with non-graduates and economics and management graduates)

Earnings and Language Investment in Switzerland Investment in English as a second language in Switzerland yields 25 percent earnings differential for fluent skills, controlling for education and experience (Grin 2003). But returns depend on whether employment is in a trade- orientated sector In French speaking Switzerland German skills are rewarded more highly than English. Net versus gross returns? Investment in human capital pattern largely a state decision. Swiss c 10% total education spending devoted to second language teaching Implies 6-13% ‘social’ return

Why should high returns persist? If private returns to languages were persistently ‘high’, then a fault would be signalled in either the labour market or education industry- or preferences or aptitudes must be constraints. Resources should flow where there are higher returns if the market works, eventually cutting earnings Are the right amount of resources being employed in fact (the market failure test)?

ELAN SME language investment questions ‘Plan’. In order to deal with customers abroad does your company have a formal language strategy? ‘Skills’. Have you acquired staff with specific language skills due to export needs? ‘Nationals’. Have you ever employed native speakers full time in your company who support your foreign trade? ‘Agents’. Have you ever used local agents and/or distributors who speak your own native language in your foreign markets? ‘Translator’. Have you ever employed external translators/interpreters for foreign trade?

British SMEs Are Different Proportions of SMEs with Language Investments and Planning (Elan Sample)

This lower UK use of language services might simply reflect a lower need relative to the continent. But, in this sample, UK SMEs export a lower proportion (37%) than the rest of Europe (45%), consistent with underinvestment in the language skills that are associated with exports Alternatively rest of Europe on average may be smaller, more open, economies than Britain Other SME and country characteristic need controlling

British businesses are expected to utilise fewer language skills than the rest of Europe. But no reason why lower British exports, if other nationals have adequately acquired English. So a test of a UK language shortfall in export model is whether the UK ‘country effect’ is positive, to offset the lower language skills input. If this country effect is zero or negative, then being English-speaking is not sufficient to counterbalance the impact on exports of lower language resources. Exports = f(language skills, country, sector, national trade openness, turnover) ….UK effect>0 for no language failure … (1)

Whatever the specification there is no positive and significant ‘UK country effect’. The larger the turnover the higher the proportion of sales abroad. Regardless of whether turnover is included in the model though, language skills are a good predictor of a higher proportion of export sales for the whole sample.

Exporting and productivity: a source of market failure? The above model cannot calculate trade lost by SMEs that do not export; these are not included in the sample. So another exercise. Harris and Li (2007) find a 34 percent long-run increase in productivity in the year that firms began exporting. And a once and for all boost to productivity of about 5 percent in the year after beginning exporting. The productivity effect, some of which must be due to language skills, may persist because of information inadequacy.

Aggregate International Trade Effects of Language another approach to testing for underinvestment in languages is through national aggregate trade. Problem is to model international trade flows so that the impact of language knowledge or ignorance can be isolated. Gravity model as source of controls

Trade measure of language underinvestment By ‘taxing’ trade with some partners but not with others, language underinvestment lowers trade with some, in part to the benefit of others (trade diversion) and in part reducing trade in total (trade destruction). (but how much is optimal given the cost of language acquisition?)

Common Languages and Trade Inadequate language skills reduce the chances of identifying profitable trading opportunities. Conversely, the language deficiency ‘tax’ is lower the more widespread are language skills in potential trading partners. The common language effect captures some of the trade diversion (away from better partners) of language barriers. A greater trade diversion effect of the common language implies greater trade destruction ( worthwhile exchanges that don’t happen) as well.

Britain’s common language trade effect significantly larger than world average. Falsifies the ‘English the world language’ trade model Whereas a common language boosts trade (using ) by 57 percent for the whole world, for the UK the advantage is 103 percent The language barrier coefficient depends on the level of the ‘language tax’ and on how well the exports of one country can be substituted for the goods of others..

‘Low’ substitutability implies a language tariff equivalent of 12 percent for the world and a UK tariff equivalent of 19 percent. ‘High’ substitutability yields a 5.1 percent world ‘language tax’ equivalent and is 8.2 percent for the UK; When national ‘goods’ are closer substitutes, a given common language effect on trade is achieved with a smaller ‘tax reduction’ Raising British standards of language competence to the rest of the world average is equivalent to between a 7 percentage point (19-12) tax reduction on British trade (low substitution) and a 3.1 percentage points ( ) (high substitution).

A reduction of a tax on exports to non-English speaking countries is equivalent to a similar rise in productivity. At stake in 2009 was a minimum of £7.3 billion or 0.5% of GDP. Worth spending almost up to this sum on improving language skills if the outlay brought British proficiency closer to world levels equivalent, by reducing language trade cost by one percent. PLUS productivity impacts from accessing a wider market. These gains seem to be perhaps as much as a one third increase in output, controlling for all inputs.

Conclusion 1 Earnings differences due to language only observed in short term unless ability or other barriers to learning Network effects imply less language investment needed for English speaking countries. But still possible to under-invest for poor information and other reasons. European SMEs export more when employing language resources UK SMEs employ fewer language resources and export less than European average. With controls, UK effect on exports never significantly positive, as it should be if English network effect offsets low language investment

Conclusion 2 More language resources also likely to move more SMEs into export Productivity increase from exporting imply big social gains from more language investment UK larger common language trade effect should not be found if the rest of the world has optimally learned English. Coefficient difference implies UK gains from achieving world average language performance at least £7 billion in 2009