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Education economics

From Wikipedia, the free encyclopedia

Educational scores are higher in rich countries with less economic inequality
Educational scores are higher in rich countries with less economic inequality

Education economics or the economics of education is the study of economic issues relating to education, including the demand for education, the financing and provision of education, and the comparative efficiency of various educational programs and policies. From early works on the relationship between schooling and labor market outcomes for individuals, the field of the economics of education has grown rapidly to cover virtually all areas with linkages to education.

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  • ✪ Economics of Education: Crash Course Economics #23
  • ✪ Economics of Education: Part-I
  • ✪ Economics of education (BSE)
  • ✪ Economics of Education
  • ✪ How to Make Black America Better: Education, Economics, Artists, Intellectuals (2001)


Adriene: Welcome to Crash Course Economics, I’m Adriene Hill Jacob: and I’m Jacob Clifford. Some of you might be watching this video in school right now, but even if you’re not, you’ve probably spent a good chunk of your life getting educated. Adriene: Nearly all countries require at least some mandatory schooling and most of those countries provide that education for free. Jacob: But nothing is ever actually free. There’s always an opportunity cost. The money and resources that go into education might be used to fund other social programs or bring down the debt. Adriene: And if you go to college, the cost is not just the tuition and books, it’s also the income you could have earned by going straight into the workforce. Jacob: But is college even worth it? Well, let's look at the economics of education. [Theme Music] Adriene: Why do governments spend billions funding universal public education? Why not just let profit seeking businesses handle it? Many argue that if education was entirely privatized it’s likely that some children would be excluded, and that would make society, as a whole, worse off. Education is a positive externality. Education benefits individuals by helping them get a job and earn more income, but it also benefits society as these individuals create art, invent cool stuff, cure diseases, and make interesting conversation at parties. More education increases productivity, GDP, and standards of living. So, today we’re going to look at the education system in the United States. We’re talking about the US not only because we make Crash Course in the US, but because education in this country is going through a lot of changes. This way, we get to talk about things like education standards, vouchers, and student debt. Now, to be sure, there are places that do things differently. For example, in the European Union college costs a lot less than it does in the US, or is even free. In America, the government pays for primary and secondary public education and heavily subsidizes college. In 2015, the federal and state governments will spend about 634 billion dollars on primary and secondary education. That’s an average of about 12,500 dollars per student each year. Which is a lot of money. And despite all that spending, the US has some serious problems with its education system. One of the biggest is inequality. Students from low income families tend to have lower math and reading test scores than those from higher income families. African American, Latino, and Native American students are much more likely to drop out of high school than their White or Asian counterparts. Jacob: For some economists, the best way to level the playing field is to focus on funding. They argue that the government should pay for early education programs, and provide extra money for disadvantaged and low-income students. For others, the answer isn’t just about more funding, it’s about having more competition. Some economists support charter schools and voucher programs that allow parents to pick schools, or open enrollment among or within school districts. Now in theory, this forces all schools to improve, or face losing their funding. Other economists focus on the teachers, and argue that they should be incentivized to improve student performance. Each of these ideas have been implemented in the US, with varying success. We have yet to find the magic formula, but it’s clear that the first step to improving equality is to invest in primary and secondary education. Now, what about higher education? Is that a good investment? Well, keep in mind that there are many reasons – not all of them economic - to go to college, and to be educated in general. People go to college because they enjoy learning and want to know more. Or maybe they want to put off getting a real job. But in economics, we focus on financial benefits. So, is college worth it? The fact is, college graduates, on average, earn more. Economists call this the “College Wage Premium.” Among 25-32 year-olds, college grads earn an average of $45,000 vs $28,000 for those who only have a high school diploma. Also, the unemployment rate for college grads is pretty much always lower. Right now, for people over 25 with a college degree, unemployment is around 3%. Now, that's vs. around 5.4 percent for those with only a high-school diploma. And it’s 8.6 percent for those who didn’t finish high school. So bam – college pays off, case closed. Adriene: Well, not quite. The people who graduate from college are NOT a randomly selected group. First, it takes a modicum of intelligence and dedication to even get into college. Second, you have to receive a fairly good primary and secondary education to be able to keep up with college work. Third, the students who attend college are more likely to come from well-off families with educated parents who have the time and energy to help encourage their success. So when you compare college grads to those with less education, you’re often comparing people from advantaged backgrounds to people without many of those advantages. The fact that college graduates make more money isn’t just about college. It’s also about life circumstances. Let’s go to the Thought Bubble: Jacob: Economists point out two main explanations for why college graduates earn more. The first is the “Human Capital” theory. The idea is that going to college actually teaches you skills that’ll help you get a higher income job. The second theory is called “Signalling.” This is the idea that some students have shown they're smart and hard-working, but in a job interview, EVERYONE is going to claim “Sure, I’m smart and hard-working!” even applicants who aren’t. So the talented applicants need something else to validate their abilities that can’t be faked by others. A college degree sends a clear signal. "Look at me! I graduated Summa, and I’ve got the notarized transcripts to prove it!" Many employers would prefer an applicant that has an actual Harvard degree over one that has an equivalent self-taught education. But a college degree isn’t only about signaling ability, we could accomplish that with a test that would take one day and $100, rather than 4 years and potentially hundreds of thousands of dollars. College degrees send other signals about socio-economic status and background. BOTH the human capital theory and the signalling theory are compatible with the data: both predict that college graduates would earn more, which is what we see. But economists have tried to figure out which theory is correct. They have compared the earnings of people who have earned 7 ½ semesters worth of college credits but didn’t graduate, to people who finished and got a degree. Both groups received about the same amount of education, so if the Human Capital theory is correct, they should earn about the same amount of money. If the Signalling theory is correct, those with degrees should earn noticeably more, and they do. But it’s a smaller gap than you would find from just comparing high school and college grads. It seems that both theories apply. Adriene: Thanks Thought Bubble. Okay, so we know that there are significant financial benefits to completing college. But what about the costs? Going to college can be really expensive. Often more than most families can afford. In the US, students have over 1 trillion dollars of debt. That’s more than Americans owe on their cars or their credit cards! More students are attending college than ever, and more of those students are paying for at least part of their education with loans. In 2012, almost 70 percent of students took out loans to pay for tuition, and the median amount they borrowed was around 27,000 dollars. By comparison, in 1993, the median amount students borrowed was around 12,500 dollars. And that’s just the median. So even if some of the hand-wringing over the total amount of student debt is overblown, the average student really is taking on a larger burden. So, this is all thanks to higher tuition, right? Well, not exactly. At four-year public universities, the average cost of tuition, room and board has gone from $10,600 dollars in 1994 to $18,900 in 2014, when you adjust for inflation. The average tuition at comparable private universities has risen from $26,500 to $42,400 during the same period. But that rising tuition number is the “sticker price” for college – in fact, most students receive very substantial discounts. Students from wealthy families, with not-so-great SAT scores might pay that full sticker price, but once you factor in cost reductions from scholarships, fellowships, grants and other sources, many students pay substantially less. Once you adjust for discounting, the rise in net tuition has been kind of modest. So, why all the debt? Well, for-profit colleges and universities might be contributing to this. Students at these schools tend to take on more debt than students at public schools or private non-profits. It’s also possible that student debt is rising because graduate school enrollment is up. And grad students borrow more than undergrads. Another reason tuitions are increasing is because the actual cost of running a college is higher than a few decades ago. As some schools compete for students and their money, some of them build luxurious dorms, climbing walls and gourmet dining to attract revenue. Another possibility is that colleges now employ more administrators and pay them a whole bunch of money. Jacob: So, in cold, hard, merciless dollars, does it make sense to spend – or borrow - a bunch of money on a college degree? Well, it depends a lot on the degree you get, but on average the answer is, yes -- as long as you finish! Many of the worst student-debt horror stories involve students who racked up large debt, but were unable to finish college. And that’s surprisingly common: Every year in the US, 60% of high-school graduates enroll in college, but only a little over half actually graduate within 6 years. That’s right: only half. But what about students that don’t have the means or the inclination to go to a four-year university? Are they doomed to live in squalor? Well, no, but again better money can be found in careers that require specific training and skills, which can be learned through a community college or through an apprenticeship. The average car mechanic earns $40,000 a year; the average plumber earns $50,000; and the average electrician $55,000. And as more young people opt to go to college and as older people in these careers retire, most economists expect these wages to rise. So what is the final conclusion? Is college even worth it? Well, I guess in the end, we have to say, it depends. It depends on where you go to school; how much you pay for your degree; and it depends on what degree you get. And, of course, on what you want to do with your life. Adriene: Education isn’t just another thing that you buy. It isn’t only about individual gain. There’s a social aspect, too. We want everyone to have access to quality education because having an educated populace benefits all of us. Education can also be a powerful tool when it comes to reducing poverty and addressing income inequality, and we're gonna talk about that next time. Thanks for watching! Jacob: Thanks for watching Crash Course Economics. It was made with the help of all these nice people. You can help keep Crash Course free, for everyone forever by supporting the show at Patreon. Patreon is a voluntary subscription service where you can support the show with a monthly contribution. Thanks for watching! DFTBA.


Education as an investment

Economics distinguishes in addition to physical capital another form of capital that is no less critical as a means of production – human capital. With investments in human capital, such as education, three major economic effects can be expected:[1]

  • increased expenses as the accumulation of human capital requires investments just as physical capital does,
  • increased productivity as people gain characteristics that enable them to produce more output and hence
  • return on investment in the form of higher incomes.

Investment costs

Investments in human capital entail an investment cost, just as any investment does. Typically in European countries most education expenditure takes the form of government consumption, although some costs are also borne by individuals. These investments can be rather costly. EU governments spent between 3% and 8% of GDP on education in 2005, the average being 5%.[2] However, measuring the spending this way alone greatly underestimates the costs because a more subtle form of costs is completely overlooked: the opportunity cost of forgone wages as students cannot work while they study. It has been estimated that the total costs, including opportunity costs, of education are as much as double the direct costs.[3] Including opportunity costs investments in education can be estimated to have been around 10% of GDP in the EU countries in 2005. In comparison investments in physical capital were 20% of GDP.[4] Thus the two are of similar magnitude.

Average years of schooling versus GDP per capita (USD 2005).
Average years of schooling versus GDP per capita (USD 2005).

Returns on investment

Human capital in the form of education shares many characteristics with physical capital. Both require an investment to create and, once created, both have economic value. Physical capital earns a return because people are willing to pay to use a piece of physical capital in work as it allows them to produce more output. To measure the productive value of physical capital, we can simply measure how much of a return it commands in the market. In the case of human capital calculating returns is more complicated – after all, we cannot separate education from the person to see how much it rents for. To get around this problem, the returns to human capital are generally inferred from differences in wages among people with different levels of education. Hall and Jones have calculated from international data that on average that the returns on education are 13.4% per year for first four years of schooling (grades 1–4), 10.1% per year for the next four years (grades 5–8) and 6.8% for each year beyond eight years.[5] Thus someone with 12 years of schooling can be expected to earn, on average, 1.1344 × 1.1014 × 1.0684 = 3.161 times as much as someone with no schooling at all.

Predicted versus actual GDP per worker. The figure shows how much one would expect each country’s GDP to be higher based on the data on average years of schooling
Predicted versus actual GDP per worker. The figure shows how much one would expect each country’s GDP to be higher based on the data on average years of schooling

Effects on productivity

Economy-wide, the effect of human capital on incomes has been estimated to be rather significant: 65% of wages paid in developed countries is payments to human capital and only 35% to raw labor.[1] The higher productivity of well-educated workers is one of the factors that explain higher GDPs and, therefore, higher incomes in developed countries. A strong correlation between GDP and education is clearly visible among the countries of the world, as is shown by the upper left figure. It is less clear, however, how much of a high GDP is explained by education. After all, it is also possible that rich countries can simply afford more education.

To distinguish the part of GDP explained with education from other causes, Weil[1] has calculated how much one would expect each country’s GDP to be higher based on the data on average schooling. This was based on the above-mentioned calculations of Hall and Jones on the returns on education. GDPs predicted by Weil’s calculations can be plotted against actual GDPs, as is done in the figure on the left, demonstrating that the variation in education explains some, but not all, of the variation in GDP.

Finally, the matter of externalities should be considered. Usually when speaking of externalities one thinks of the negative effects of economic activities that are not included in market prices, such as pollution. These are negative externalities. However, there are also positive externalities – that is, positive effects of which someone can benefit without having to pay for it. Education bears with it major positive externalities: giving one person more education raises not only his or her output but also the output of those around him or her. Educated workers can bring new technologies, methods and information to the consideration of others. They can teach things to others and act as an example. The positive externalities of education include the effects of personal networks and the roles educated workers play in them.[6]

Positive externalities from human capital are one explanation for why governments are involved in education. If people were left on their own, they would not take into account the full social benefit of education – in other words the rise in the output and wages of others – so the amount they would choose to obtain would be lower than the social optimum.[1]

Demand for education

Demand for vs. supply of education

A 2013 study assesses demand- and supply-side factors that affect educational access and attainment in development countries, and it shows that addressing demand-side factors, such as geographic gaps between rural and urban areas, higher levels of population growth (which place constant pressure on new enrolments) and child labour, can often have greater impact on increasing levels of education in developing countries than supply-side factors, such as constructing additional school facilities, hiring more teachers etc.[7]

Liberal approaches

The dominant model of the demand for education is based on human capital theory. The central idea is that undertaking education is investment in the acquisition of skills and knowledge which will increase earnings, or provide long-term benefits such as an appreciation of literature (sometimes referred to as cultural capital).[8] An increase in human capital can follow technological progress as knowledgeable employees are in demand due to the need for their skills, whether it be in understanding the production process or in operating machines. Studies from 1958 attempted to calculate the returns from additional schooling (the percent increase in income acquired through an additional year of schooling). Later results attempted to allow for different returns across persons or by level of education.[9]

Statistics have shown that countries with high enrollment/graduation rates have grown faster than countries without. The United States has been the world leader in educational advances, beginning with the high school movement (1910–1950). There also seems to be a correlation between gender differences in education with the level of growth; more development is observed in countries which have an equal distribution of the percentage of women versus men who graduated from high school. When looking at correlations in the data, education seems to generate economic growth; however, it could be that we have this causality relationship backwards. For example, if education is seen as a luxury good, it may be that richer households are seeking out educational attainment as a symbol of status, rather than the relationship of education leading to wealth.

Educational advance is not the only variable for economic growth, though, as it only explains about 14% of the average annual increase in labor productivity over the period 1915-2005. From lack of a more significant correlation between formal educational achievement and productivity growth, some economists see reason to believe that in today’s world many skills and capabilities come by way of learning outside of traditional education, or outside of schooling altogether.[10]

An alternative model of the demand for education, commonly referred to as screening, is based on the economic theory of signalling. The central idea is that the successful completion of education is a signal of ability.[11]

Marxist critique

Although Marx and Engels did not write widely about the social functions of education, their concepts and methods are theorized and criticized by the influence of Marx as education being used in reproduction of capitalist societies. Marx and Engels approached scholarship as "revolutionary scholarship" where education should serve as a propaganda for the struggle of the working class.[12] The classical Marxian paradigm sees education as serving the interest of capital and is seeking alternative modes of education that would prepare students and citizens for more progressive socialist mode of social organizations. Marx and Engels understood education and free time as essential to developing free individuals and creating many-sided human beings, thus for them education should become a more essential part of the life of people unlike capitalist society which is organized mainly around work and the production of commodities.[12]

Financing and provision

In most countries school education is predominantly financed and provided by governments. Public funding and provision also plays a major role in higher education. Although there is wide agreement on the principle that education, at least at school level, should be financed mainly by governments, there is considerable debate over the desirable extent of public provision of education. Supporters of public education argue that universal public provision promotes equality of opportunity and social cohesion. Opponents of public provision advocate alternatives such as vouchers.[13][14][15]

Pre-primary education financing

Compared to other areas of basic education, globally comparable data on pre-primary education financing remain scarce. While much of existing non-formal and private programmes may not be fully accounted for, it can be deduced from the level of provision that pre-primary financing remains inadequate, especially when considered against expected benefits. Globally, pre-primary education accounts for the lowest proportion of the total public expenditure on education, in spite of the much-documented positive impact of quality early childhood care and education on later learning and other social outcomes.[16]

Education production function

An education production function is an application of the economic concept of a production function to the field of education. It relates various inputs affecting a student’s learning (schools, families, peers, neighborhoods, etc.) to measured outputs including subsequent labor market success, college attendance, graduation rates, and, most frequently, standardized test scores. The original study that eventually prompted interest in the idea of education production functions was by a sociologist, James S. Coleman. The Coleman Report, published in 1966, concluded that the marginal effect of various school inputs on student achievement was small compared to the impact of families and friends.[17] Later work, by Eric A. Hanushek, Richard Murnane, and other economists introduced the structure of "production" to the consideration of student learning outcomes. Hanushek at al. (2008, 2015) reported a very high correlation between "adjusted growth rate" and "adjusted test scores".[18]

A large number of successive studies, increasingly involving economists, produced inconsistent results about the impact of school resources on student performance, leading to considerable controversy in policy discussions.[19][20] The interpretation of the various studies has been very controversial, in part because the findings have directly influenced policy debates. Two separate lines of study have been particularly widely debated. The overall question of whether added funds to schools are likely to produce higher achievement (the “money doesn’t matter” debate) has entered into legislative debates and court consideration of school finance systems.[21][22][23] Additionally, policy discussions about class size reduction heightened academic study of the relationship of class size and achievement.[24][25][26]

Notable education economists

See also


Definition of Free Cultural Works logo notext.svg This article incorporates text from a free content work. Licensed under CC-BY-SA IGO 3.0 License statement: Investing against Evidence: The Global State of Early Childhood Care and Education, 15, Marope, P.T.M., Kaga, Y., UNESCO. UNESCO. To learn how to add open license text to Wikipedia articles, please see this how-to page. For information on reusing text from Wikipedia, please see the terms of use.


  1. ^ a b c d Weil, David N. (2009). Economic Growth (Second ed.). Boston: Pearson Addison-Wesley. ISBN 978-0-321-41662-9.
  2. ^ Eurostat (2008). "5% of EU GDP is spent by governments on education" (PDF). Statistics in Focus 117/2008. Archived from the original (PDF) on 2008-12-30. Retrieved 2013-09-18.
  3. ^ Kendrick, J. (1976). The Formation and Stocks of Total Capital. New York: Columbia University Press. ISBN 978-0-87014-271-0.
  4. ^ Eurostat (2008). "GDP expenditure and investment".
  5. ^ Hall, Robert E.; Jones, Charles I. (1999). "Why Do Some Countries Produce So Much More Output per Worker than Others?". Quarterly Journal of Economics. 114 (1): 83–116. CiteSeerX doi:10.1162/003355399555954.
  6. ^ Burt, Ronald S. (2005). Brokerage and Closure. United Kingdom: Oxford University Press. pp. 46–55. ISBN 9780199249152.
  7. ^ Krauss, Alexander. 2013.  External influences and the educational landscape: Analysis of political, economic, geographic, health and demographic factors in Ghana. New York: Springer Press.
  8. ^ Daniele Checchi, 2006. The Economics of Education: NYUMBANI Human Capital, Family Background and Inequality, Cambridge. ISBN 0-521-79310-6 ISBN 978-0-521-79310-0 Description.
  9. ^ David Card "returns to schooling," The New Palgrave Dictionary of Economics , 2nd Edition. Abstract.
  10. ^ Kling, Arnold and John Merrifield. 2009." Goldin and Katz and Education Policy Failings in Historical Perspective". Econ Journal Watch 6(1): 2-20.[1]
  11. ^ Johannes Hörner, 2008. "signalling and screening." The New Palgrave Dictionary of Economics, 2nd Edition, Abstract.
  12. ^ a b "Douglas Kellner, Marxian Perspectives on Educational Philosophy: From Classical Marxism to Critical Pedagogy" (PDF). Archived from the original (PDF) on 2010-11-23. Retrieved 2011-05-22.
  13. ^ William A. Fischel, 2008. "educational finance," The New Palgrave Dictionary of Economics, 2nd Edition. Abstract.
  14. ^ Caroline Hoxby, 2008. "school choice and competition," The New Palgrave Dictionary of Economics, 2nd Edition, Abstract.
  15. ^ Daniele Checchi, 2006. The Economics of Education: Human Capital, Family Background and Inequality, ch. 5, "Education Financing."
  16. ^ Marope, P.T.M.; Kaga, Y. (2015). Investing against Evidence: The Global State of Early Childhood Care and Education (PDF). Paris, UNESCO. p. 15. ISBN 978-92-3-100113-0.
  17. ^ Coleman, James S., Ernest Q. Campbell, Carol J. Hobson, James McPartland, Alexander M. Mood, Frederic D. Weinfeld, and Robert L. York. 1966. Equality of Educational Opportunity. Washington, D.C.: U.S. Government Printing Office.
  18. ^ Hanushek, Eric A.; Jamison, Dean T.; Jamison, Eliot A.; Woessmann, Ludger (Spring 2008). "Education and Economic Growth: It's not just going to school, but learning something while there that matters". Education Next. 8 (2): 62–70. Retrieved 2016-10-13.
  19. ^ Eric A. Hanushek, 2008. "education production functions," The New Palgrave Dictionary of Economics , 2nd Edition. Abstract.
  20. ^ Hanushek, Eric A. (1986). "The Economics of Schooling: Production and Efficiency in Public Schools". Journal of Economic Literature. 24 (3): 1141–1177. JSTOR 2725865.
  21. ^ Gary Burtless, ed., 1996. Does Money Matter? The Effect of School Resources on Student Achievement and Adult Success. Washington, D.C.: The Brookings Institution. Description and scroll to chapter preview links.
  22. ^ Greenwald, Rob; Hedges, Larry V.; Laine, Richard D. (1996). "The Effect of School Resources on Student Achievement". Review of Educational Research. 66 (3): 361–396. doi:10.3102/00346543066003361.
  23. ^ Hanushek, Eric A. (1996). "A More Complete Picture of School Resource Policies". Review of Educational Research. 66 (3): 397–409. doi:10.3102/00346543066003397. JSTOR 1170529.
  24. ^ Lawrence Mishel, and Richard Rothstein, eds., 2002. The Class Size Debate. Link. Archived 2010-07-22 at the Wayback Machine Washington, DC: Economic Policy Institute.
  25. ^ Ehrenberg, Ronald G., Dominic J. Brewer, Adam Gamoran, and J. Douglas Willms, 2001. "Class size and student achievement," Psychological Science in the Public Interest, 2(1), pp. 1-30.
  26. ^ Nye, B.; Hedges, L. V.; Konstantopoulos, S. (2000). "The Effects of Small Classes on Academic Achievement: The Results of the Tennessee Class Size Experiment". American Educational Research Journal. 37 (1): 123–151. doi:10.3102/00028312037001123.


Selected entries on education from The New Palgrave Dictionary of Economics, 2008), 2nd Edition:

Further reading

External links

This page was last edited on 19 May 2019, at 00:10
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