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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.
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:
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%.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. 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. Thus the two are of similar magnitude.
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.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.
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.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, Weilhas 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.
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.
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).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.
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.
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.
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.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.
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.
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.
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.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".
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.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. Additionally, policy discussions about class size reduction heightened academic study of the relationship of class size and achievement.
Economics is the social science that studies the production, distribution, and consumption of goods and services.
Education Reform in the United States is the name given to the goal of changing public education. Historically, reforms have taken different forms because the motivations of reformers have differed. However, since the 1980s, education reform has been focused on changing the existing system from one focused on inputs to one focused on outputs. In the United States, education reform acknowledges and encourages public education as the primary source of K-12 education for American youth.The one constant for all forms of education reform includes the idea that small changes in education will have large social returns in citizen health, wealth and well-being. For example, a stated motivation has been to reduce cost to students and society. From ancient times until the 1800s, one goal was to reduce the expense of a classical education. Ideally, classical education is undertaken with a highly educated full-time personal tutor. Historically, this was available only to the most wealthy. Encyclopedias, public libraries and grammar schools are examples of innovations intended to lower the cost of a classical education.
Gross domestic product (GDP) is a monetary measure of the market value of all the final goods and services produced in a specific time period. GDP (nominal) per capita does not, however, reflect differences in the cost of living and the inflation rates of the countries; therefore using a basis of GDP per capita at purchasing power parity (PPP) is arguably more useful when comparing living standards between nations, while nominal GDP is more useful comparing national economies on the international market.
Macroeconomics is a branch of economics dealing with the performance, structure, behavior, and decision-making of an economy as a whole. This includes regional, national, and global economies.
Public capital is the aggregate body of government-owned assets that are used as a means for productivity. Such assets span a wide range including: large components such as highways, airports, roads, transit systems, and railways; local, municipal components such as public education, public hospitals, police and fire protection, prisons, and courts; and critical components including water and sewer systems, public electric and gas utilities, and telecommunications. Often, public capital is defined as government outlay, in terms of money, and as physical stock, in terms of infrastructure.
Human capital is the stock of habits, knowledge, social and personality attributes embodied in the ability to perform labour so as to produce economic value.
Economic growth can be defined as the increase in the inflation-adjusted market value of the goods and services produced by an economy over time. It is conventionally measured as the percent rate of increase in real gross domestic product, or real GDP.
Infrastructure is the fundamental facilities and systems serving a country, city, or other area, including the services and facilities necessary for its economy to function. Infrastructure is composed of public and private physical improvements such as roads, railways, bridges, tunnels, water supply, sewers, electrical grids, and telecommunications. In general, it has also been defined as "the physical components of interrelated systems providing commodities and services essential to enable, sustain, or enhance societal living conditions".
James Samuel Coleman was an American sociologist, theorist, and empirical researcher, based chiefly at the University of Chicago. He was elected president of the American Sociological Association. He studied the sociology of education and public policy, and was one of the earliest users of the term "social capital." His Foundations of Social Theory influenced sociological theory. His "The Adolescent Society" (1961) and "Coleman Report" were two of the most cited books in educational sociology. The landmark Coleman Report helped transform educational theory, reshape national education policies, and it influenced public and scholarly opinion regarding the role of schooling in determining equality and productivity in the United States.
Government spending or expenditure includes all government consumption, investment, and transfer payments. In national income accounting the acquisition by governments of goods and services for current use, to directly satisfy the individual or collective needs of the community, is classed as government final consumption expenditure. Government acquisition of goods and services intended to create future benefits, such as infrastructure investment or research spending, is classed as government investment. These two types of government spending, on final consumption and on gross capital formation, together constitute one of the major components of gross domestic product.
National accounts or national account systems (NAS) are the implementation of complete and consistent accounting techniques for measuring the economic activity of a nation. These include detailed underlying measures that rely on double-entry accounting. By design, such accounting makes the totals on both sides of an account equal even though they each measure different characteristics, for example production and the income from it. As a method, the subject is termed national accounting or, more generally, social accounting. Stated otherwise, national accounts as systems may be distinguished from the economic data associated with those systems. While sharing many common principles with business accounting, national accounts are based on economic concepts. One conceptual construct for representing flows of all economic transactions that take place in an economy is a social accounting matrix with accounts in each respective row-column entry.
International economics is concerned with the effects upon economic activity from international differences in productive resources and consumer preferences and the international institutions that affect them. It seeks to explain the patterns and consequences of transactions and interactions between the inhabitants of different countries, including trade, investment and transaction.
Cultural economics is the branch of economics that studies the relation of culture to economic outcomes. Here, 'culture' is defined by shared beliefs and preferences of respective groups. Programmatic issues include whether and how much culture matters as to economic outcomes and what its relation is to institutions. As a growing field in behavioral economics, the role of culture in economic behavior is increasingly being demonstrate to cause significant differentials in decision-making and the management and valuation of assets.
Eric Alan Hanushek is an economist who has written prolifically on public policy with a special emphasis on the economics of education. Since 2000 he has been a Paul and Jean Hanna Senior Fellow at the Hoover Institution, an American public policy think tank located at Stanford University in California.
The socioeconomic impact of female education constitutes a significant area of research within international development. Increases in the amount of female education in regions tends to correlate with high levels of development. Some of the effects are related to economic development. Women's education increases the income of women and leads to growth in GDP. Other effects are related to social development. Educating girls leads to a number of social benefits, including many related to women's empowerment.
This glossary of economics is a list of definitions of terms and concepts used in economics, its sub-disciplines, and related fields.
Paul William Glewwe is an economist and Professor of Applied Economics at the University of Minnesota. His research interests include economic development and growth, the economics of the public sector, and poverty and welfare. He formerly was the Director of the Center for International Food and Agricultural Policy and served as co-chair of the education programme of the Abdul Latif Jameel Poverty Action Lab (J-PAL).
Ludger Wößmann is a German economist and professor of economics at the Ludwig Maximilian University of Munich (LMU). Moreover, being one of the world's foremost education economists, he is the director of the ifo Center for the Economics of Education at the ifo Institute. Beyond the economics of education, his research interests also include economic growth and economic history. In 2014, Wößmann's empirical research on the effects of education and his corresponding contribution to public debate were awarded the Gossen Prize, followed by the Gustav Stolper Prize in 2017.
Victor Chaim Lavy is an Israeli economist and professor at the University of Warwick and the Hebrew University of Jerusalem. His research interests include labour economics, the economics of education, and development economics. Lavy belongs to the most prominent education economists in the world.
Sarah E. Turner is an American professor of economics and education and Souder Family Endowed Chair at the University of Virginia. She also holds appointments in the university's Department of Economics, the Batten School of Leadership and Public Policy, and the Curry School of Education. She is a faculty research associate at the National Bureau of Economic Research and a research affiliate at the Population Studies Center at the University of Michigan.
Selected entries on education from The New Palgrave Dictionary of Economics , 2008), 2nd Edition: