The Economics of Education Chapter 1 The Economics of Education

Education: An Important Industry Education is the country’s largest industry 25% of the U.S. population is involved in education in some way Funding for elementary and secondary schools is 4.6% of GDP Funding for postsecondary schools is 3.0% of GDP Funding for education is an investment in human capital

Education as Human Capital Human capital--the knowledge, skills and habits that are acquired by people over a lifetime. Theodore Shultz defined human capital as follows: Human capital has the fundamental attributes of the basic economic concept of capital, namely, it is a source of future satisfactions, or of future earnings, or both of them. What makes it human capital is the fact that it becomes an integral part of a person.

Creation of Wealth and Education Human capital is essential to the creation of wealth Educated workers are more productive. Their knowledge is transferred to the private sector in the form of work. Public sector Private sector Education Human Capital

Taxes Pay for Education Government through taxation produces public education services All people benefit from education, so all people (private sector) pay for public education. Private sector Public sector Taxation $$$

Education: Government’s Role All economists saw the need for education but different roles for government, from absolute control (Marx) to vouchers for parents to chose public or private schools for their children (Friedman). Economic philosophies affect fiscal matters and education. Marx Keynes Galbraith Friedman Smith Communist Government Intervention Liberal Conservative Capitalist

Public Education Benefits Education produces broad public benefits for all individuals As educational services increase, economic productivity and wealth increase Educational system—result and determinant of social and economic progress, e.g. inventions, economic growth Education--related to lower crime rates, better health, lower costs of social services and higher taxes to fund government programs and services Related to increased participation in a democratic system of government

Private Benefits of Education Individual Benefits are monetary and nonmonetary range of job opportunities job security life expectancy Average earnings increases Better health Increased appreciation for the arts, science and culture

Mean Average Earnings per Person in the United States, Age 25 and Older, in Full-Time Employment, by Gender: 2008 Source: U.S. Department of Commerce, Bureau of the Census. (2005, October). Money income of households, families, and persons in the United States. Current Population Reports, Series P-60.

Median Annual Income of Year-round, Full-time Workers 25 Years Old and Over, by Highest Level of Educational Attainment and Sex: 2003 through 2008 Elementary/Secondary College Bachelor's or Higher Degree Sex and Year   Total Less than 9th Grade Some High School, No Completion High School Completion (includes equivalency) Some College, No Degree Associate's Degree Bachelor's Degree Master's Degree Professional Degree Doctor's Degree 1 2 3 4 5 6 7 8 9 10 11 12 Current Dollars Males 2003 41,939 21,217 26,468 35,412 41,348 42,871 62,075 56,502 70,640 100,000 87,131 2004 42,084 21,646 26,280 35,726 41,906 44,395 62,682 57,199 71,434 82,397 2005 43,317 22,330 27,189 36,302 42,418 47,180 66,166 60,020 75,025 85,864 2006 45,759 22,708 27,653 37,031 43,834 47,072 66,933 60,906 75,432 2007 47,004 23,375 29,317 37,855 44,899 49,042 70,401 62,087 76,284 92,089 2008 49,000 24,255 29,678 39,009 45,821 50,147 72,215 65,800 80,962 Females 31,565 16,907 18,938 26,074 30,142 32,253 45,116 41,327 50,163 66,491 67,214 32,008 17,015 19,167 26,045 30,822 33,489 45,937 41,703 51,319 75,100 68,387 33,075 16,142 20,125 26,289 31,399 33,393 46,948 42,172 51,412 80,458 66,852 35,095 18,133 20,130 26,737 31,954 35,159 49,571 45,408 52,438 76,242 70,519 36,086 18,261 20,398 27,240 32,837 36,333 50,398 45,773 55,426 71,098 68,989 36,697 18,634 20,405 28,382 32,626 36,760 51,409 47,026 57,512 71,297 74,025 Source: U.S. Census Bureau. Historical Income Tables - People, Table P-24. Accessed March 11, 2010 from: http://www.census.gov/hhes/www/income/histinc/p24.html

Economic Principles and Education Marginal dollar principle marginal utility—pleasure or satisfaction consumer achieves diminishing marginal utility—utility of additional units of a good services decreases as additional units consumed marginal dollar—dollars better spent for some other goods or services Point of diminishing returns additional expenditures yield very little or no additional returns Is there a point of diminishing returns for education?

Economic Principles and Education Exclusion or free rider principle exclusion principle—ability of consumer to enjoy exclusively a good or service free riders—garnering benefits without spending income Externalities justify ability principle Education produces benefits external to the jurisdiction or person that paid for it (externalities) so everyone benefits, some benefit indirectly (e.g. lower crime rate) Free education for all (K-12) costs of education paid by all, based on ability to pay wealthier pay more because they have greater “ability”

Noneconomic Benefits of Education Free democratic society—well-informed and responsible citizens Schools--source of moral and ethical values Preservation of nation’s culture and people’s sense of identify External benefits—justify taxation to finance education healthier society more informed electorate more productive labor force higher standard of living enhanced economic growth

Taxation and Education Benefit system—tax based on benefits received Ability principle—taxes based on ability to pay Measured by economic well-being or individual income

Cost-Quality Relationship in Education Relates funding to student outcomes (test scores) Problems with establishing this relationship lack a definition of high quality that is measurable and acceptable to all concerned goals of education vary from time to time and place to place Research limitations many variables contribute to student achievement, not just spending, such as motivation and hard work of student poor databases and limited methodology in the past

Cost-Quality Relationship in Education Recent research—better data and new methods How resources are deployed and used matter Small class sizes, quality teachers, quality preschool matter These resources cost money, so money matters, especially for poor children and youth