Other Important Terms In Economics Of Education

Published Date: 02 Nov 2017

Education economics or the economics of education is the study of economic issues relating to education, including the demand for education and the financing and provision of education. More specifically a variety of topics are given consideration such as: Education and Labor market, the Benefits of Education, Education, Economic Growth and Technological Changes, Education, Income distribution and Discrimination. Different topical issues are explored and research in these areas is ongoing.

Human Capital

Many Scholars worldwide including China have argued that the concept of human capital is central to much of the research in economics of education, and also important in other branches of economics which at times overlap with economics of education, particularly analysis of the labor market and employment policy, the determinants of earnings, and the distributions of incomes. An important distinction in economics is between investment and consumption. In this case consumption refers to the purchase or use of goods and services which bring immediate but short lived benefits. Investment, on the other hand, refers to the acquisition of assets which yields benefits over a long period of time [1]. What then is Human Capital? Human capital refers to the stock of competences, knowledge and personality attributes embodied in the ability to perform labor so as to produce economic value. It is the attributes gained by a worker through education and experience. Many early economic theories refer to it simply as workforce, one of three factors of production, and consider it to be a fungible resource -- homogeneous and easily interchangeable [21].

Economic theories of capital and investment tended to concentrate on investment in physical capital, such as buildings, factories, and machines which generate income in form of production of goods and services. However, many economists have pointed out that education and training creates assets in terms of knowledge and skills which increase the productive capacity of manpower in just the same way as investment in new machinery raises the productive capacity of the stock of physical capital. Several studies have been undertaken to validate this theory [1], [21].

The concept of human capital can be applied not only to education and training, but to any activity which increases the quality and the productivity of labor force and thus raises the future income levels. Thus expenditures on health and migration can also be regarded as investment in human capital. The question at issue is how profitable is for individuals or society to invest resources in education or training, rather than in physical capital or in other forms of human capital. The technique of cost-benefit analysis has shown positive benefits of investing in humans and society and possible returns. The benefits of education can also be measured in terms of the extra lifetime incomes or earnings enjoyed by educated man power, compared to workers with lower levels of education, or illiterate workers. There is plenty of research in this area. The rate of return can also help in resource allocation i.e primary, secondary or tertiary [2][1].

Since education is not purely an economic activity, but has many other objectives, concepts such as human capital and cost-benefit analysis can never provide a complete answer as to the question of how resources should be allocated. However, the analysis of the returns to the investment in education can throw some light on the question how to allocate resources most efficiently or profitably, in other words how to maximize the returns or benefits derived from those resources. A great deal of economic theory is concerned with the vital issue of resource allocation, since society resources are scarce and therefore a choice must be made between alternative ways of allocating resources between competing ends.

Demand for education

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). Studies from 1958 attempted to calculate the returns from additional schooling. Later results attempted to allow for different returns across persons or by level of education.

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). When looking at correlations in the data, education seems to generate economic growth, however, it could be that we have this causality relationship backwards. We need to consider this possibility. 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 [22, 21].

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 tradition education, or outside of schooling altogether.

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

Financing and provision

Another big issue in the economics of education which sometimes have ideological differences is how education should be funded. For instance, how financial burden should be shared among the different stakeholders such as the government, parents, students and what should be the balance between public and private sources of finance. This question has both efficiency and equity implications [8].

[8],[2]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. Economic of education theory sometimes cannot answer the question of who should pay for education, but can throw light on the efficiency and equity implication of alternative methods of financing education. The question of whether students should receive financial aid by means of grants, loans, subsidized work study opportunities or a combination of different kind aids has provoked some controversy in Europe, United States and to some extent China. There different ways in which loans and grants are administered in different countries in the West. A number of questions arise especially when it comes to higher education-who pays? Who benefits? These are among some hot questions which need continuous addressing in Education finance.

Other important terms in Economics of Education

Here we also highlight some important terminologies which have been used predominantly in the field of economics of education. Economic efficiency-How are resources allocated in order to produce goods and services in economically efficient ways, resources can be allocated in order to promote welfare. A branch of economics called ‘welfare economics’ can be used to in application of welfare efficiency. Contribution of education to Economic growth-The question of how efficiently society’s resources are allocated is crucially linked with the concept of economic growth, usually defined as an increase in the total national income or product. Economists have tried to answer the question of how much education contributed/s to economic growth. Some economists have argued that more investment in education of the labor force leads to increased GDP. It is now generally recognized that education does contribute to economic growth but it is very difficult to identify and measure the precise contribution relative to other factors. The Internal Efficiency of Education- The economists use the term ‘efficiency’ to refer to the relationships between the inputs and outputs of a process, and can be applied in the same way to education. The difference between analyzing efficiency of a factory or an industrial process and the efficiency of a school, university or a country’s education system that it is much more difficult to define and measure the output of education. Different economics techniques can be used to analyze internal efficiency. The Demand for Educated manpower-As probably known educated man power is one of the most crucial inputs in the economy of any country and in developing countries like Zambia and Ghana, where is frequent shortage of physical capital, the availability of skilled man power may be particularly crucial. Education makes workers more productive. Different studies have been conducted on the nature and amount of manpower needed to execute different assignments. Generally, it is agreed that educated man power is crucial for both educational and economical growth of any country [6] [10].

Education production function

An education production functions 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 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.

The report launched a large number of successive studies, increasingly involving economists that provided inconsistent results about the impact of school resources on student performance.[9][10] The interpretation of the various studies has been very controversial, in part because the findings have been directly entered into 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. Additionally, policy discussions about class size reduction heightened academic study of the relationship of class size and achievement.

Economics of Education for Africa—World Bank Perspective

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The provision of Education in most African Countries is mostly financed by governments with support from either bilateral or multilateral donors including the World Bank. Because of this the World Bank has taken keen interest to analyze education projects using its benchmarks. It is also true that Africa is lagging behind in most of the education benchmarks and most of its education is still either supported by bilateral or multilateral donors. The cases are differing from country to country. The world Bank analyzes economics of education based on the international guidelines which mostly assess its education projects in Africa [20]. Education economists analyze both what determines or creates education and what impact education has on individuals and the societies and economies in which they live. Historically at the World Bank a great deal of emphasis has been placed on determining outcomes to educational investment and the creation of human capital. The primary mission of the economics of education group is to identify opportunities for improved efficiency, equity, and quality of education and promote effective education reform processes; to help improve, among both World Bank staff and clients, knowledge of what drives education outcomes and results; to better understanding how to strengthen the links of education systems with the labor market; and to build and support a network of education economists and build bridges to all those who are interested in their work [11].

The World Bank addresses key themes of Economics of Education through work in these five topic areas: These areas have been used world over but a lot more in Africa to ascertain the economic value of different world Bank project that have been operational on the continents [23].

1) Economic Analysis of Education Interventions

2) Finance and Expenditures in Education

3) Public-Private Partnerships in the Education Sector

4) School-Based Management

5) Impact Evaluation

6) Quality of Education 

What is economic analysis?

The economic analysis of a project helps select and design projects that contribute to the welfare of a country.  Various tools of economic analysis help determine the economic and fiscal impact of the project, including the impact on society and the major stakeholders involved, as well as the project’s risks and sustainability. A good economic analysis answers the following questions [23]:

What is the objective of the project? 

This helps identify tools for the analysis. A clearly defined objective also helps in identifying the possible alternatives to the project.

What will be the impact of the project? 

This question concerns a counterfactual as the difference between the situation with or without the project is crucial for assessing the incremental costs and benefits of the project.

Are there any alternatives to the project? If so how would costs and benefits of the alternatives to achieve the same goal compare to the project in question?

Is there economic justification of each separable component of the project?

Who gains and who loses if the project is implemented? 

The analysis has to make sure that the most benefit accrues to the poor.

What is the fiscal impact of the project?

Is the project financially sustainable and what are the risks involved?

Are there any other externalities? What is the environmental impact of the project?

(Adapted from Belli, P. et al (1998) Handbook on Economic Analysis of Investment Operations )  

Why is economic analysis important?

All countries face the problem of allocating limited resources such as capital, skilled and unskilled labor, land and other natural resources to a variety of different uses such as production of consumer goods, investment in industry, infrastructure, education, health etc. with an aim to reach a more fundamental goal of reducing poverty, accelerating economic growth and/or reducing income inequalities. Given limited resources, choices have to be made between alternative uses of these resources such that the benefit to the economy and society is as large as possible.  Therefore, all World Bank projects must meet certain selection criteria, including economic justification. 

The World Bank's Ten Dimensions of Economic Analysis are used as an organizing framework to represent categories necessary for sound economic analysis for education projects. Information on these ten dimensions are available from "Key Issues" [23].

Finance and Expenditure in Education

To ensure macro-economic stability, as well as to promote equitable economic growth, countries need to maintain public spending at a level consistent with their long-run financing ability while, at the same time, establishing transparent budget mechanisms that allocate and manage public resources equitably and reduce poverty. However, in the real world, public resource allocation decisions do not always reflect sound economic policies.

The World Bank, with its lending programs in numerous client countries, must ensure that borrowed World Bank funds reach the intended beneficiaries. World Bank Education Economists collaborate with experts from Country units and Poverty Reduction and Economic Management units to undertake economic and sector work (such as economic memorandums, poverty assessments and public expenditure reviews) as well as reports on specific issues in education to help with informed policy making in the sector.

Education policy research pays considerable attention to the productivity and efficiency of the education sector, in particular of government expenditure in the sector. Determining how governments and families can best finance and allocate scarce resources to produce quality education and the skills that individuals need for success, is an integral task of the education economists. The Education Sector Strategy Update (ESSU) also calls for integrating education into a country-wide perspective focusing on how education ties into the macro-economic context. It particularly emphasizes the need for close attention to fiscal policies and decentralization policies affecting school management and finance [23][14].

  

In this regard the education sector specifically seeks to answer the following questions in a country's public expenditure analysis [13][18]:

How much is spent on education and what is the share of the government's expenditure?

How do governments finance the education sector and what do they finance? 

Is there equitable distribution of the public resources?

Is the public getting its money's worth?

Is the spending adequate and sustainable?

 

Public-Private partnership in Education

The provision of schooling is largely provided and financed by governments. However, due to unmet demand for education coupled with shrinking government budgets, the public sector in several parts of the world is developing innovative partnerships with the private sector. Private education encompasses a wide range of providers including for-profit schools (that operate as enterprises), religious schools, non-profit schools run by NGOs, publicly funded schools operated by private boards, and community owned schools. In other words, there is a market for education.

The main rationale for Public-Private Partnership (PPP) programs is the potential role of the private sector for expanding equitable access and improving learning outcomes. In low income countries excess demand for schooling results in private supply when the state cannot afford schooling for all. In high income countries, however, "differentiated" demand leads to a demand for private schooling, as a sophisticated clientele demands different kinds of schools. By providing demand-side financing and contracting private organizations to provide support services, governments can provide better choices to parents and grant them an opportunity to fully participate in their children’s schooling. The education market highlights the importance of effective regulatory frameworks and contractual instruments to ensure quality and effective use of public resources.

What is school-based management?

Levels of authority to school level.

[18]School-based management (SBM) is the decentralization. Responsibility and decision-making over school operations is transferred to principals, teachers, parents, sometimes students, and other school community members. The school-level actors, however, have to conform to, or operate, within a set of centrally determined policies.

SBM programs take on many different forms, both in terms of who has the power to make decisions as well as the degree of decision-making devolved to the school level. While some programs transfer authority to principals or teachers only, others encourage or mandate parental and community participation, often in school committees (sometimes known as school councils). In general, SBM programs transfer authority over one or more of the following activities: budget allocation, hiring and firing of teachers and other school staff, curriculum development, textbook and other educational material procurement, infrastructure improvement, setting the school calendar to better meet the specific needs of the local community, and monitoring and evaluation of teacher performance and student learning outcomes. SBM also includes school-development plans, school grants, and sometimes information dissemination of educational results (otherwise known as ‘report cards’).

Starting in the United States, the United Kingdom, Australia and Canada, SBM programs have been implemented and are currently being developed in a number of countries, including Hong Kong (China). The majority of the SBM projects in the current World Bank portfolio are in Latin American and South Asian countries, including Argentina, Bangladesh, Guatemala, Honduras, India, Mexico, and Sri Lanka. There are also two Bank-supported SBM projects in Europe and Central Asia (in FYR Macedonia and in Serbia and Montenegro), and one each in East Asia and the Pacific (the Philippines), the Middle East and North Africa (Lebanon), and Sub-Saharan Africa (Lesotho). Other projects and programs have been introduced more recently in Madagascar, the Gambia, and Senegal [18] [19].

Why is school-based management important?

Advocates of SBM assert that it should improve educational outcomes for a number of reasons. First, it improves accountability of principals and teachers to students, parents and teachers. Accountability mechanisms that put people at the center of service provision can go a long way in making services work and improving outcomes by facilitating participation in service delivery, as noted in the World Bank’s 2004 World Development Report, Making Services Work for Poor People. Second, it allows local decision-makers to determine the appropriate mix of inputs and education policies adapted to local realities and needs.

Impact of school-based management

Evaluations of SBM programs offer mixed evidence of impacts. Nicaragua’s Autonomous School Program gives school-site councils – comprised of teachers, students and a voting majority of parents – authority to determine how 100 percent of school resources are allocated and authority to hire and fire principals, a privilege that few other school councils in Latin America enjoy. Two evaluations found that the number of decisions made at the school level contributed to better test scores [18] [20]. Mexico’s compensatory education program provides extra resources to disadvantaged rural primary schools and all indigenous schools, thus increasing the supply of education. However, the compensatory package has several components. If one breaks the intervention up in its multiple components, then it is shown that empowering parent associations seems to have a substantial effect in improving educational outcomes, even when controlling for the presence of beneficiaries of Mexico’s large and successful conditional cash transfer program (Oportunidades, formerly Progressa). This is strong evidence of the positive effects of decentralizing education to the lower levels (Gertler, Patrinos and Rubio forthcoming). Various evaluations of SBM programs in the United States have found evidence of decreased dropout and student suspension rates but no impact on test scores.

What is impact evaluation?

The World Bank is committed to monitoring and evaluating the impact of its projects. Impact evaluation is a policy tool that helps discern the causal impact of a project or a policy initiative. Impact evaluation techniques compare the impact on the beneficiaries of a certain policy intervention or project with a counterfactual group that has not been exposed to the same intervention or project. The results from impact evaluations can help inform policy makers on where to allocate scarce resources and can also provide evidence on whether current policies are working or not. The economics of education cluster collaborates closely with the Development Economics Research group, the Human Development Chief Economists office and with country task teams to help project teams design and integrate impact evaluation components in education projects.

Conceptually, impact evaluation seeks to estimate the effect of a given intervention on a critical indicator (e.g., educational enrollment, standardized tests, etc) by comparing with and without the intervention on the same unit of observation. Of course observing the same individual with and without the program creates a fundamental problem given that we will never observe the same individual in two different states at the same time. Therefore, impact evaluation tries to assess the impact of programs through techniques such as randomization of benefits, regression discontinuity analysis, differences in differences and propensity and matching estimators, among others.

Why is impact evaluation important?

Under limited budgets and scarce resources, public policy requires evidence of what works, and what does not. A rigorous impact evaluation can show if things work, and why they work. Effective evaluation will inform policy makers and permit improvements in policies and program implementation. Evaluation can inform program design (for example eligibility and types of benefits) and can improve operations and efficiency. Additionally, the information generated by impact evaluation may be useful for program sustainability and can be a valuable asset in the negotiation of budgets and in the provision of reliable information to inform public opinion. The lack of reliable information on the effects of many education projects is an area with important information gaps and merits the highest priority for future research.

The World Bank's Chief Economist has initiated a program to coordinate impact evaluations for projects and programs supported by World Bank lendings. Supported by the Human Development Network Chief Economist unit, the economics of education group works in close collaboration with the Development Economics unit on developing and designing impact evaluations for education projects. The World Bank Impact Evaluation website provides an up-to-date and comprehensive collection of materials on this topic including methods & techniques, key reading and selected evaluations on impact evaluation.

Quality of Education-Overview

Analyses of the benefits of education have a long history in the economics literature. Studies have established that spending on education is an investment with a return. Conclusions about education’s contributions to productivity are well established. The literature counts hundreds of studies that estimate the economic benefits of investments in education. The link to growth is especially critical. After establishing the link between education and growth in the 1960s, the causal association came under attack in recent years. Adding the important dimension of quality – what students know, or cognitive ability – re-establishes the link between education and economic growth [10] [11]. The crucial factor is learning achievement. Improving learning outcomes, along with the expansion of schooling, will improve labor productivity, reflected in workers’ earnings, and will contribute to higher and sustainable rates of national income growth. The crucial next step is to establish what policies and programs can improve learning outcomes. There are important efforts underway in a number of countries to document through rigorous impact assessments the causal links between reforms and learning outcomes.

There is also a need to better measure learning outcomes. While many countries have examination systems and national standardized tests, too few countries participate in regional or international achievement exercises such as the International Association for the Evaluation of Educational Achievement’s (IEA) (Trends in International Mathematics and Science Study (TIMSS) and Progress in International Reading Literacy Study (PIRLS) or the OECD’s Programme for International Student Assessment (PISA). However, more and more countries are signing up for TIMSS and PISA. In 2000, 43 countries participated in PISA, rising to 57 countries in 2006, to 66 countries in 2009.

Researchers have begun to use international assessments to analyze the determinants of learning. They have focused on such issues as central examinations, curriculum, school autonomy, teachers, unions, student assessments, parental participation, administration and competition, among other factors. The approaches vary but most use an education production function. More recently, researchers have begun to take advantage of over time data and applied more rigorous empirical strategies in order to get at the vexing question of causation. There is a growing use of international assessment results to analyze the determinants of learning in developing and emerging economies.

Economics of Higher Education: National Income and Spending

Importance of tertiary education

Most data presented below has been extracted to the Harvard project (2010) on importance of Africa’s Higher Education. Because of the interest we have in the continent of Africa, we wanted to highlight a few issues relating to economics of education in the context. Correlation with national income, Educational and economic data suggest that in the present world economy, without substantial numbers of university-trained professionals a country cannot advance. No educational factor correlates as strongly with national income as does university enrollment. Although correlation is not of course causation, the link between GNI (or GDP) and university education is not coincidental, as the same relationship holds not only between countries but also over time for a single developing country: As the case of South Korea-provides a good example for argument. It latest development has been attributed to advancement of Higher education [17].

Nevertheless, many economists in the past have downplayed the importance of higher education for development: "Historically, low levels of tertiary education have not created much concern within development initiatives, since...there had been little empirical evidence of economic benefits for the population as a whole (let alone specifically for the poor)." (Bloom, Canning, and Chan, International Higher Education, 2006.) In recent years, this viewpoint is changing and the importance of tertiary education is more widely acknowledged

Is primary education important? It is true that no country at present has reached high income status without near 100% primary enrollment. Full primary enrollment may prove to be a necessary condition for development, but it is not a sufficient one. Countries with full primary enrollment have per capita incomes ranging from abject poverty ($160/yr, or less than 50 cents a day) to the wealthiest of all ($52,000/yr). This scatter is not an artifact of recent increases in primary enrollment. Togo and Madagascar have had over 90% primary enrollment since 1975 and remain poor. (Madagascar's GNI is unchanged since 1975.) Malawi and Rwanda have actually seen their GNI fall in the last 25 years even as their primary enrollments rose from 60% to 100%. Primary education alone does not ensure economic growth [17] [21].

How much should be spent on tertiary education? High relative spending in Africa Some researchers have suggested that sub-Saharan African countries overspend on universities and tertiary education. African countries do spend a far higher relative amount on each university student trained than does the U.S. or Europe. Higher-income countries spend only ~30% of per capita GDP on each university student; most African governments' per-student subsidy amounts to many times per capita GDP. For the most part the higher relative spending reflects the hard realities of providing a university education. Students in any country need the same desks, books, and buildings, and the salaries of qualified professors do not drop indefinitely just because a country also has a large supply of impoverished farmers. Providing a reasonable university education requires a minimum threshold of spending. For poorer African countries, that threshold represents a higher percentage of GDP. If the government is the primary source of funding for universities, high relative per-pupil spending is inescapable [17].

National income declines across countries, per-pupil spending initially drops but then levels off. Most low-income countries spend in the range of $1800-4000 PPP per university student per year. Three low-income African countries are high-spending outliers (Ethiopia, Eritrea, and Burkina Faso), and the three wealthiest sub-Saharan African countries (South Africa, Namibia, and Botswana) have opted for higher spending. The remainder of the countries lie within the marked range.

Note that in the two lowest-spending countries (Madagascar and Cameroon), student surveys repeatedly mention problems characteristic of underfunding: massively overcrowded classrooms (Cameroon) and lecturers absent and moonlighting at second jobs (both). We therefore assume that ca. $2000 PPP / (student*year) is an approximate lower bound for the provision of a minimally acceptable university education (without laboratories, computers, or up-to-date textbooks). In the absence of private funding this cost is borne by governments [17].

Enrollment limits. The low enrollments in sub-Saharan African countries are then determined by these budgetary constraints and by the lack of private funding.

Given that they cannot drop per-pupil spending any lower, most African governments respond the only way they can to keep education budgets manageable: they limit access to public universities. Sub-Saharan African countries spend about half as much of GDP on tertiary education as do high-income countries (0.7% as opposed to 1.3%). But with that money, the African countries can educate a far smaller fraction of their citizens (4% as opposed to over 60%). Without private funding, the low African enrollment rates can grow only in parallel with national economies [13][6].

Conclusion

In a paper like this, it is impossible to give the full context of economics of education especially providing an understanding of where the economics of education has been, where it is heading, and where it needs to go in the future to provides further insights into the human role in production and producing of human skills valued in the labor market. We have to however remember that traditional areas of economics of education include education finance, the production of knowledge, the relationship between education and economic growth. We have now seen theories being modified and new concepts have appeared in this discipline.