Students take many standardized tests throughout their school years. These measure not only cognitive ability and reasoning, but also vocabulary. In some cases, not understanding a word presented in a question could make the difference between getting the answer right or wrong. Schools use these test scores to determine placement in advanced courses, and colleges factor the scores into their acceptance decisions. Improving vocabulary can improve standardized test scores.
With a large vocabulary, it's possible to choose just the right word for the situation. For example, you might differentiate "rain" as either a "sprinkle" or a "downpour." This becomes important in careers that are writing-heavy such as journalism, but doctors, lawyers, engineers and others can also benefit from being able to make these types of distinctions.
Understanding the words that you're reading or hearing is important. In some cases, when you come across a word that you don't understand, you may just skim over it, determining the general meaning from the other words that surround it. However, when you don't understand a lot of the words in a piece or in what someone is saying, you won't be able to understand the meaning.
People communicate in a variety of different styles, and having a broad vocabulary will help you to understand many different types of people. You might be able to use simple language when speaking with children, but you should switch into more complex language when dealing with your work colleagues.