1. The Economics of Education
Chapter 1
The Economics of Education

2. 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

3. 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.

4. 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

5. 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
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6. 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

7. 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

8. 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

9. 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.

10. 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:

11. 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?

12. 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”

13. 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

14. 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

15. 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

16. 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