Economics of Education

Economics of Education:
A 50-year anniversary recap
George Psacharopoulos
Athens University
August 28, 2008
Outline
¾ Theoretical highlights
¾ Empirical evidence
¾ Policy practice
¾ Open questions
George Psacharopoulos -1-

Mid to late 1950s
Macro instigators
Abramovitz Y= f(K, L, R)
Solow Y = f(K, L,T)
Schultz “Where does T come from?!”
Micro theorists
Mincer W = f(S, EX)
Becker W = f(S, A, SES)

1960s
The macro estimators
Y = f(L, Kp, Kh)

Schultz
gy = sl gl + (Ip/Y)rp + (lh/Y) rh
Denison Y = f(Kp, L0, L1, L2, L3 )

gy = sl0gl0 + sl1 gl1+ sl2gl2+ sl3 gl3 +(Ip/Y)rp

Human Capital Theory
Earnings/
productivity
More educated
+++++
-- Less educated
Age

Evidence fits theory
Earnings
$ University
graduate
++++++
++++++
Secondary school
graduate
--
--
--
0
18 -- 22 Age

1960s
The micro estimators
(W W )
∑ (1 + r ) = ∑ (W C u ) (1 + r )
43 4
Becker, Hansen, Blaug u
−
s t t
t +
s
t =1 t =1 t
r = …..
ln Wi = α + βSi + γ 1 EX i + γ 2 EX i + ε i
2
Mincer
β = ∂ ln W ≈ r
∂S

The estimates
Macro
Reduced residual
Micro
Mincerian r ≈ 10%
Beckerian r ≈ 5% to 30%

Private returns to an extra year of schooling
% 16
14
12
10
8
6
4
2
0
y
K
n
SA
a
lia
ce
an
pa
ai
re
U
ra
an
U
Sp
m
Ko
Ja
st
Fr
er
Au

Highest returns to primary education
(World averages)
27 %
19 %
17 %
10%
Primary Secondary Higher

Higher returns to female education
%
12
10 %
10 9%
4
2
0
Men Women
George Psacharopoulos - 10 -
Higher returns in developing countries
%
12 11 %
10
7%
8
0
Industrial Developing
Higher returns to general education
%
14
12 %
12 10 %
10
8
6
4
2
0
General Vocational
Higher returns in the private sector
%
12 11 %
10 9%
0
Private Public
Rising higher education returns
(% points change in 15 years)
% points
2 +2
1.5
1
0.5
Primary
0
Higher
-0.5
-1
-1.5
-2
-2.5 -2
Private and social returns
World Averages
30% 27%
25%
19% 19%
20% 17%
13% Private
15% 11% Social
10%
5%
0%
Primary Secondary Higher
Private returns properties
¾ Undisputable
¾ Universal, global
¾ Explaining behavior
¾ Analyzing distribution effects
Social returns for policy
¾ Narrow social returns,
9 incorporating direct market effects
¾ Wide social returns,
9 incorporating external and non-market effects
Narrow vs. wide social returns
1970s - The debates
Ability
True ΔW = ΔW (1- α) α coefficient = 0.33 (assumed)

Griliches’ estimate: α = 0.10
Screening (Arrow, Stiglitz, Spencer)
Ashenfelter et al.: α<0

Natural experiments, twins
Productivity
∂ Rice
β = ∂ Rice
∂ S
β=
β = ∂ Rice
∂ S
Farmers’ education ∂S
Externalities Holly grail
1980s …… 1990s
Second generation macro
-
Theory: Lucas, Romer
} Y = S f(K, L, S)
S = g(Y)
Estimates: Barro et al. Y/P or gy = f(S, Z)
International time series – cross sections
Difficult to summarize - A mess
2000 – The wider social effects
Tax revenues
Welfare payments
Health
Crime
Civic
Happiness ☺
Wider social benefits
(High school completion vs. dropping out)
¾ $192 billion extra income and tax
¾ $58 billion health cost savings
¾ $1.4 billion/year in reduced crime costs
¾ 9.2 years longer life expectancy
Preschool benefit-cost ratios
¾ Perry Preschool B/C = 8
¾ Chicago Child-Parent B/C = 7
Heckman’s grand summary
Preschool
Returns
School
10%
Job training
6 25 Age
Enter quality
- Years of schooling (S) Denison, Mincer
- Cost of schooling (C) Schultz
- Quality?
Education quality indicators
• Old generation (input-based)

- Expenditure per student
- Student-teacher ratio
• New generation (output-based)

- Learning, achievement
- Value added of achievement per $ spent
Education production functions
Achievement = f(buildings, teachers, textbooks, student SES)
∂ (Achievement)
· = β textbooks
∂ (Textbooks)
β textbooks
Cost-effectiveness =
Cost of textbooks
Macro quality effects
¾ Measured by output (learning), not input (spending)
9 A 1% increase in the adult literacy skill raises

productivity by 2.5% in OECD countries
9 A one standard deviation increase in

international cognitive test scores is
associated with a 1 percentage point higher
growth rate
The institutional setting
560
540
UK
520 AUS FR
DK
SWE
Achievement inMat
IRL
500
USA GER
480 SP
460 IT
POR
GR
440
0 10 20 30 40 50 60 70 80 90 100
Central Decision Making (% )
Enter equity
¾ Income distribution: More equal if K-12
¾ Distributive incidence: Regressivity
¾ Efficiency – equity tradeoff: Only if initial

conditions optimal
¾ Need normative value weights: Left to politicians

voters
Who benefits from public funding?
Appropriation of public funding for education by the poorest and the richest in
Ghana, 1992 (%)
Quintile
Education Level 1 5
Primary 22 14
Secondary 15 19
Tertiary 6 45
Enter values
Social wellbeing = f (Efficiency, Equity)
Max SW = (Y/P)
α (1- Gini)β
α & β values????
Education policy history
1945 - 1980s: Manpower planning

Educational planning
Long term requirements forecasts
Likj = bikj Yikj

i = education, k= occupation, j = economic sector
1990s - ……..: Cost-benefit

Cost-effectiveness
At the margin
Policy implications
¾ Do not fund by inertia

¾ Give priority to funding human capital
¾ Within education, give priority to lower levels
¾ Fund general curricula
¾ Fund quality improvements
¾ Decentralize education decision making
Evolution of lending for education
Ed % of total Bank lending
20
1945 1962 1990 2005
Level composition of education lending
% of total education lending
Primary
Tertiary
1962 1990 2005
Vocational composition of education lending
General
Vocational
1962 1990 2005
Material composition of education lending
Software inputs
Bricks and mortar
1962 1990 2005
International Organizations
¾Unesco
¾UNICEF
¾UNDP
¾World Bank
¾ILO
¾OECD
¾European Union
European university problems
· Heidelberg and Sorbonne??
· Museum pieces
Private share of tertiary education financing
100%
United States
Australia, Japan
United Kingdom, Spain
.
Most of continental Europe
0%
Outlook
Further university development/quality divide:
- Anglo-Saxon pluralistic finance style
- Old European state finance style
A major contradiction
¾ Lisbon’s competitiveness and

¾ State education monopoly
• No common education policy (Treaty of Rome)

• Need ECOFIN equivalent in education?
• 2010 targets already missed.
• Lisbon, Bologna “nice”, but…..
• Lifelong financing?
EU university circa 2010
Italian University circa 1350

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Economics of Education:

A 50-year anniversary recap

George Psacharopoulos -1-

Solow Y = f(K, L,T)

Schultz “Where does T come from?!”

Becker W = f(S, A, SES)

George Psacharopoulos -2-

The macro estimators

Y = f(L, Kp, Kh)

Denison Y = f(Kp, L0, L1, L2, L3 )

George Psacharopoulos -3-

George Psacharopoulos -4-

George Psacharopoulos -5-

George Psacharopoulos -6-

George Psacharopoulos -7-

George Psacharopoulos -8-

Primary Secondary Higher

George Psacharopoulos -9-

¾ Narrow social returns,

9 incorporating direct market effects

¾ Wide social returns,

9 incorporating external and non-market effects

True ΔW = ΔW (1- α) α coefficient = 0.33 (assumed)

Screening (Arrow, Stiglitz, Spencer)

Ashenfelter et al.: α<0

Externalities Holly grail

Estimates: Barro et al. Y/P or gy = f(S, Z)

International time series – cross sections

Difficult to summarize - A mess

¾ $192 billion extra income and tax

¾ $58 billion health cost savings

¾ $1.4 billion/year in reduced crime costs

¾ 9.2 years longer life expectancy

¾ Perry Preschool B/C = 8

¾ Chicago Child-Parent B/C = 7

- Years of schooling (S) Denison, Mincer

- Cost of schooling (C) Schultz

• Old generation (input-based)

• New generation (output-based)

Achievement = f(buildings, teachers, textbooks, student SES)

9 A 1% increase in the adult literacy skill raises

9 A one standard deviation increase in

¾ Income distribution: More equal if K-12

¾ Distributive incidence: Regressivity

¾ Efficiency – equity tradeoff: Only if initial

¾ Need normative value weights: Left to politicians

Social wellbeing = f (Efficiency, Equity)

1945 - 1980s: Manpower planning

Likj = bikj Yikj

1990s - ……..: Cost-benefit

¾ Do not fund by inertia

1945 1962 1990 2005

1962 1990 2005

1962 1990 2005

Bricks and mortar

1962 1990 2005

· Heidelberg and Sorbonne??

United Kingdom, Spain

Further university development/quality divide:

- Anglo-Saxon pluralistic finance style

- Old European state finance style

¾ Lisbon’s competitiveness and

• No common education policy (Treaty of Rome)

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