University of Oslo - M.Phil Higher Education - September 2006 Economics of Higher Education Demand for Higher Education Thierry Chevaillier

University of Oslo - M.Phil Higher Education - September 2006 Higher education as a good A good Likely to bring Immediate satisfaction = consumption good Non monetary benefits enjoyed while studying Future satisfaction = Investment good Increased earnings (monetary benefits) Non monetary future benefits

University of Oslo - M.Phil Higher Education - September 2006 Consumption of Higher Education The consumption value of higher education can be based on: learning new things meeting new people moving to a new city participating in campus and student activities getting a status in the society

University of Oslo - M.Phil Higher Education - September 2006 Behaviour of the consumer Substitution Price sensitivity

University of Oslo - M.Phil Higher Education - September 2006 What is expected from education in the future? Monetary returns Extra income expected over a lifetime Information Risk (health, failure, economic downturns…) Non-monetary returns Intended benefits like: -A wider choice -A lifestyle - More opportunities -A network of connections

University of Oslo - M.Phil Higher Education - September 2006 How is choice made? Through a combination of consumption and investment decision: “many individuals are willing to give up substantial future wage returns in order to acquire the education of their choice” “young people tend to put more weight on the present consumption value of education than on the future income possibilities when making their educational choice.”

University of Oslo - M.Phil Higher Education - September 2006 Investing in education Human capital “Resources invested in Man in order to make him more productive” This concept can be used At the microeconomic level –Individuals invest in their education –Families invest in their children’s education At the macroeconomic level –“Norway invests the resources from oil in HE”

University of Oslo - M.Phil Higher Education - September 2006 Deciding to invest in education How investment decision are taken –- in business –- by houselolds Cost-benefit analysis of investment –Indicators Internal rates of return Mincer earnings function

University of Oslo - M.Phil Higher Education - September 2006 Education has a cost Tuition and fees Specific expenditures –Books, computer, etc. Extra cost of living Foregone earnings (Opportunity cost)

University of Oslo - M.Phil Higher Education - September 2006 Cost-benefit analysis –United Kingdom (Dearing report)

University of Oslo - M.Phil Higher Education - September 2006 Internal rates of return Definition The internal rate of return (IRR) of an investment is the discount rate that equates the present value of the expected lifetime stream of earnings supplement to the present value of the stream of costs Calculation r such as  (E t - E 0 ) /(1+r) t =  C t /(1+r) t for t = 0 to n

University of Oslo - M.Phil Higher Education - September 2006 Mincer earnings function The logarithm of earnings is a function of –The amount of schooling –The amount of experience –LnE(s,x) = a 0 + r s s + b 0 x + b1 x 2 + e –Where s is the amount of schooling and x the amount of experience (in years) Estimation of the rate of return on education –In the earnings function, the coefficient of schooling in the earning function, r s, is the percentage change in wages associated with each additional year of schooling (Coefficients of semi-log functions are elasticities)

University of Oslo - M.Phil Higher Education - September 2006 The two methods compared « Mincer (1974) has provided a great service and convenience in estimating returns to education by means of the semi-log earnings function » (Psacharopoulos & Patrinos, p.3). The Mincer equation does not take into account the direct costs of the investment.

University of Oslo - M.Phil Higher Education - September 2006 Data used for estimating rates of return Cross sectional data –From census or employment surveys –Estimated for different age groups at the same date –Refers to past schooling Longitudinal cohort data –Follow groups of the same age over time –Are affected by variations in economic growth

University of Oslo - M.Phil Higher Education - September 2006 Private rates, social rates of return Private rate of returns –Use net income (after tax) –are higher than social returns in case of public subsidization of education Social rate of returns –use gross income (as taxes are a social benefit) –should include cost (and benefits …) borne by others than students and families (firms, states, local authorities…) Fiscal rate of return

University of Oslo - M.Phil Higher Education - September 2006 Evolution of rates of return over time « During the last 12 years, average returns to schooling have declined by 0.6 percentage points. At the same time, average schooling levels have increased. Therefore, and according to theory, everything else being the same, an increase in the supply of education has led to a slight decrease in the returns to schooling. » Psacharopoulos & Patrinos

University of Oslo - M.Phil Higher Education - September 2006 Comparison of rates of return across countries

University of Oslo - M.Phil Higher Education - September 2006 Comparison of rates of return across countries « Average returns to schooling are highest in the Latin America and the Caribbean region and for the Sub-Saharan Africa region. Returns to schooling for Asia are at about the world average. The returns are lower in the high-income countries of the OECD. Interestingly, average returns to schooling are lowest for the non-OECD European, Middle East and North African group of countries. » Psacharopoulos & Patrinos

University of Oslo - M.Phil Higher Education - September 2006 Rates of returns by level of education « The classic patterns of falling returns to education by level of economic development and level of education are maintained. » –Psacharopoulos & Patrinos

University of Oslo - M.Phil Higher Education - September 2006 Higher education - OECD countries

University of Oslo - M.Phil Higher Education - September 2006 Why rates of return differ Education at a glance OCDE Table A13.3. Private internal rates of return to education ( )

University of Oslo - M.Phil Higher Education - September 2006 Gender differences Education at a glance OCDE

University of Oslo - M.Phil Higher Education - September 2006 Further readings Easy: –OECD, Human Capital investment : an international comparison, OECD-CERI, Paris 1998 Difficult –Blöndal S., S. Field and N. Girouard, "Investment In Human Capital Through Post-Compulsory Education and Training: Selected Efficiency And Equity Aspects" (in the compendium) –Psacharopoulos & Patrinos, Returns… a further update (in the compendium) Reference: –Carnoy M., International encyclopedia of economics of education, Elsevier, Oxford 1995