The Role of Schools/ Education as Human Capital/ Importance of Schooling

1. The Role of Schools/ Education as Human Capital/ Importance of Schooling Lecture Notes for PPOL-805-10 (EDUCATION FINANCE REFORM) Joydeep Roy

2. Goals of Schooling • We begin with an overview of the goals or objectives of schooling • Most of the goals are same across countries and over times • However, there are some differences depending on the particular historical, social and institutional context • Distinction between quantifiable and non-quantifiable goals, and between cognitive and non-cognitive skills • Of immediate concerns to politicians and policymakers in the U.S. • Increase the overall achievement levels, particularly in the STEM disciplines, so that the U.S. is a world leader in education • Close the black-white and the Hispanic white achievement gaps, in particular, close all achievement gaps • Both reflected in the federal law No Child Left Behind or NCLB, enacted in 2001

3. The Adelaide Declaration on National Goals for Schooling in the Twenty-first Century Schooling should develop fully the talents and capacities of all students. In particular, when students leave school, they should: • have the capacity for, and skills in, analysis and problem solving and the ability to communicate ideas and information, to plan and organise activities, and to collaborate with others. • have qualities of self-confidence, optimism, high self-esteem, and a commitment to personal excellence as a basis for their potential life roles as family, community and workforce members. • have the capacity to exercise judgement and responsibility in matters of morality, ethics and social justice, and the capacity to make sense of their world, to think about how things got to be the way they are, to make rational and informed decisions about their own lives, and to accept responsibility for their own actions. • be active and informed citizens with an understanding and appreciation of Australia’s system of government and civic life. • have employment related skills and an understanding of the work environment, career options and pathways as a foundation for, and positive attitudes towards, vocational education and training, further education, employment and life-long learning. • be confident, creative and productive users of new technologies, particularly information and communication technologies, and understand the impact of those technologies on society. • have an understanding of, and concern for, stewardship of the natural environment, and the knowledge and skills to contribute to ecologically sustainable development. • have the knowledge, skills and attitudes necessary to establish and maintain a healthy lifestyle, and for the creative and satisfying use of leisure time.

4. The Adelaide Declaration on National Goals for Schooling in the Twenty-first Century (Contd.) In terms of curriculum, students should have: • attained high standards of knowledge, skills and understanding through a comprehensive and balanced curriculum in the compulsory years of schooling encompassing the agreed eight key learning areas: • the arts; • English; • health and physical education; • languages other than English; • mathematics; • science; • studies of society and environment; and • technology. • and the interrelationships between them. • attained the skills of numeracy and English literacy; such that, every student should be numerate, able to read, write, spell and communicate at an appropriate level. • participated in programs of vocational learning during the compulsory years and have had access to vocational education and training programs as part of their senior secondary studies. • participated in programs and activities which foster and develop enterprise skills, including those skills which will allow them maximum flexibility and adaptability in the future.

5. The Adelaide Declaration on National Goals for Schooling in the Twenty-first Century (Contd.) Schooling should be socially just, so that: • students’ outcomes from schooling are free from the effects of negative forms of discrimination based on sex, language, culture and ethnicity, religion or disability; and of differences arising from students’ socio-economic background or geographic location. • the learning outcomes of educationally disadvantaged students improve and, over time, match those of other students. • Aboriginal and Torres Strait Islander students have equitable access to, and opportunities in, schooling so that their learning outcomes improve and, over time, match those of other students. • all students understand and acknowledge the value of Aboriginal and Torres Strait Islander cultures to Australian society and possess the knowledge, skills and understanding to contribute to, and benefit from, reconciliation between Indigenous and non-Indigenous Australians. • all students understand and acknowledge the value of cultural and linguistic diversity, and possess the knowledge, skills and understanding to contribute to, and benefit from, such diversity in the Australian community and internationally. • all students have access to the high quality education necessary to enable the completion of school education to Year 12 or its vocational equivalent and that provides clear and recognised pathways to employment and further education and training.

6. The Role of Government in Education • Why does the government need to intervene in the market for education? • Economists talk of market imperfections, which implies that normal functioning (voluntary exchange) of markets cannot adequately meet the needs for schooling as we want them • These market imperfections can be lumped under three categories • Positive externalities or significant “neighborhood” effects • Problems with intergenerational aspect of schooling (paternalistic concerns for children) • Financial or credit constraints

7. Externalities or Neighborhood Effects in Education • The basic idea is that education confers benefits on the society or polity at large, over and above the benefits it confers to the individuals themselves • the gain from the education of a child accrues not only to the child or to his parents but also to other members of the society. The education of my child contributes to your welfare by promoting a stable and, democratic society. It is not feasible to identify the particular individuals (or families) benefited and so to charge for the services rendered. There is therefore a significant "neighborhood effect." • Milton Friedman, Capitalism and Freedom, 1962. • Possible channels • An educated electorate is vital to a successful democratic society • An educated workforce can be important in adoption of new technologies and improve his own as well as his coworkers’ productivity • A negative relationship between education and crime • A positive relationship between education and health

8. Paternalistic concern for children • Minors, who are the usual recipients of education, are not responsible for deciding how much schooling they will obtain. This responsibility falls to their parents, who also bear the costs of education. Since the benefits of education accrue primarily to the children who receive it, the level of spending on education depends critically on the degree of parental altruism. If parents place a low value on improvements in their children’s future earning potential, then they may underinvest in their children, and government intervention might be justified on the ground that it protects children from decisions by their parents • James Poterba, 1996. • Note, however, that left to their own, parents might also invest more in their children than the state would do. • Further, as Poterba notes, this same argument can be used to justify government intervention in almost everything relating to children , like their feeding, e.g.

9. Financial or Credit Constraints • Capital market constraints - which refers to the fact that some parents and households may not have enough money of their own to invest in their children – is an important factor. • If some households face borrowing constraints that limit their total access to credit, then even parents whose altruism matched that of the social planner might under-invest in their children. • Loans for education may be difficult to obtain in the private loan markets • Question of adequate collateral, particularly for people who may be least likely to have these

10. Market Imperfections in Education (Contd.) • These market imperfections lead to government involvement of some form in education • Though it is extremely difficult to quantify the exact magnitude of these imperfections • Note, however, that the form of the intervention is of crucial importance • Intervention can take the form of mandates, public subsidies or direct provision • Can have unintended effects

11. Market Imperfections in Education (Contd.) • Peltzman (1973) shows that free public schools can lead some parents who would otherwise have chosen schools better than their local public schools to send their children to those schools. • lower-quality, but free, public schools may on balance be more attractive to parents than higher-quality schools for which they must pay tuition. • even if there is a market imperfection, it may be optimal for the government not to intervene as the cost of government action may exceed the gains from correcting the market imperfections (issue of “government failure,” often due to the underlying political process)

12. Mandates or Subsidies or Direct Provision? • A government mandate is a rule requiring that all households purchase a particular good or service. • Subsidies are voucher-like schemes • In formal economic terms, they are the Pigouvian subsidy that alters the price individuals face, so that their private choices will yield the socially efficient level of consumption • Direct provision is where the government itself provides education to children. • There are pros and cons of each of these instruments. • In fact, within the education sector itself, all three are used at some point or the other, as Poterba (1996) notes • Mandates have been used for child care services (government sets up rules that each child care provider has to follow), subsidies have been used for veterans (GI Bill) as well as for college tuition in state universities, and government has been the primary provider of elementary and secondary schooling.

13. Public provision of schooling • Of late, this has become a matter of intense debate • actual administration of educational institutions by the government, the "nationalization," as it were, of the bulk of the "education industry" is much more difficult to justify on these, or, so far as I can see, any other, grounds. • Milton Friedman, Capitalism and Freedom, 1962. • However, there are some cases where public provision can have desirable effects • The most important factor may be related to creating a set of “common” values, necessary for social and political stability and for fostering a sense of togetherness. • Another scenario is when distributional issues are important. In education, for example, there may be important externalities across children within a classroom or school – the so-called peer effects - this might be difficult to resolve in the private sector. • Other potential concerns include the profit-seeking motive of private firms, restricting potentially wasteful private competition, etc.

14. Public Schooling as means to foster a common sense and values • The major problem in the United States in the nineteenth and early twentieth century was not to promote diversity but to create the core of common values essential to a stable society. Great streams of immigrants were flooding the United States from all over the world, speaking different languages and observing diverse customs. The "melting pot" had to introduce some measure of conformity and loyalty to common values. The public school had an important function in this task • Milton Friedman, Capitalism and Freedom, 1962.

15. Criticisms against public provision of schooling • One general argument is that the public sector is characterized by “production inefficiency”, since they do not have to compete with other firms in the market • Controversial issue, since empirical studies on vouchers in the U.S. reach differing conclusions • The absence of any objective criterion against which the activities of the public schools can be measured. • In the private sector, you can just transfer your child to a different school • Tiebout choice is present, but this puts poor and minority families at a disadvantage • Deadweight loss of raising tax revenues • Differing estimates put the cost of raising $1 in tax to be anything between $1.10-$2.00

16. Goals of public schooling(From The Cardinal Principles of Secondary Education, 1918) • Physical activity, instruction in personal hygiene and in public health • Academic skills • Preparation for traditional household roles of husbands and wives • Vocational education, including selection of jobs appropriate to each student’s abilities and interests • Civic education: preparation for participation in neighborhoods, towns, cities, villages, etc. • Worthy use of leisure • Ethical character, described as paramount in a democratic society

17. Education as Human Capital • How much education – measured in terms of years of schooling, say – should an individual have? • Economists want to think about education in terms of “human capital” • Capital is roughly defined as something that is an input in a production process (which in turn yields income) and which last over long periods of time • Schooling, medical care, job training, etc. can all be called capital in this sense • However, because one cannot separate a person from his or her education or health, these are forms of human capital

18. Acquisition of schooling (human capital) • The essential tradeoff is between foregone earnings today versus higher earnings in the future. • Thus, people who are credit constrained, or who have higher discount rates, or who are less able or less prepared, go for less education, thereby determining the distribution of educational attainment in the population • Important question for policymakers • Can subsidies help? Are people credit-constrained, or are they simply information-constrained (that is, they are not aware of all the options they have, both in terms of schooling choices and in terms of scholarships available) • Concept of rate of return to education • At the margin, this is defined to be the percentage increase in earnings per dollar spent in educational investments. • For example, if you spend $20,000 for an additional year of schooling, and your earnings go up by $2,000 for every year thereafter, then the rate of return on your schooling costs is (2,000*100/20,000) or 10 percent.

19. Benefits of education go beyond the labor market • even with the same level of income, a person may benefit from education - in reading, communicating, arguing, in being able to choose in a more informed way, in being taken more seriously by others and so on. The benefits of education, thus, exceed its role as human capital in commodity production. • Amartya Sen, Development as Freedom, 1999. • We next discuss some effects of education on health, crime, improved coworker productivity, etc. • We also discuss how other aspects of daily living might significantly affect education, by looking at the effects of housing on schooling

20. A Note on Causality • The most important challenge in empirical studies in public policy settings, other than availability of data, is separating out causal effects from simple or casual correlations. • The idea is that if, for example, we find in the data that people who have a college education earn higher than those who did not attend college, can we immediately conclude that this is the effect of college education? • Not necessarily, since college-educated people are generally very different from non-college going workers, and part or most of the higher earnings may be attributable to these other favorable factors (higher parental income, higher parental education and involvement, crime and drug-free neighborhood, etc.) enjoyed by the college-going population. • The solution is to get what is called an “exogenous variation” – an instrument (a change in rules for compulsory school attendance, say) which affects certain people and does not affect certain others, even when these two sets of people are exactly alike on other dimensions.

21. Effect of Education on Earnings, Children’s Education and Workplace Productivity • Studies consistently find that an additional year of education leads to higher earnings in the labor market • Some evidence for both the human capital model (discussed in class) and the signaling model (I will talk about this briefly in next class) • There is also some, though limited, evidence that parental education positively affects children’s educational attainment • Substantial evidence that mother’s education significantly affect children’s health • Some evidence also that an increase in education has positive spillover effects on aggregate productivity and the economy

22. Effect of Education on Health • Cutler and Lleras-Muney summarize what is known about the effect of education on health outcomes • They find very significant effects of education on different aspects of health, both self-reported and observed • Possible channels by which education affects health • Education may improve health simply because it results in higher income and wealth, including access to health care. • However, the effect of education persists even after controlling for incomes, occupation, etc. For example, more educated people use seat belts more often. • Since education generally provides individuals with a better life over a longer period of time - in economic terms it increases the present discounted value of future lifetime utility - people may be more likely to invest in protecting that future.

23. Effect of Education on Health (Contd.) • Possible channels by which education affects health (contd.) • Education can also provide individuals with better access to information and improved critical thinking skills • It was the more educated people who were more likely to quit smoking after the 1964 Surgeon General Report first publicized the dangers of smoking • Be sure you have a look at Tables 1-3 and Figure 2 in Cutler and Lleras-Muney, and know how to read and interpret these. We will be using similar tables and charts throughout the course. (These were the ones handed out in lecture.)

24. Effect of Education on Crime • There are different reasons why schooling might lead to a lower incidence of crime • First, schooling increases earnings in the labor market, thereby reducing the need to engage in illicit behavior. • Second, punishment for crime typically involves incarceration, and this time-out-of-the-labor-market is more costly for people who have higher potential income • Third, education may directly affect the financial or psychic rewards from crime itself. Recall the discussion earlier about goals of schooling – if schools are successful in inculcating in students a sense of what is right and what is wrong, this might lead to lower criminal activity.

25. Effect of Education on Crime (Contd.) • Lochner and Moretti (2004) find that schooling significantly reduces the probability of incarceration and arrest. • They estimate that the social benefit per additional male graduate is around $1,170-$2,100 • Since they estimate that completing high school raise average annual earnings by about $8,040, this social benefit translates to a 14-26 percent of the private return from high school completion (earnings are considered to be a private return, since people get to keep what they earn in the labor market, net of tax) • Lochner and Moretti compare the results of two policies to lower crime – hiring additional police and improving high school graduation rates – and conclude that while both reduce crime, increasing educational attainment is far more cost-effective.

26. Questions to think about (we’ll discuss them next week) • How should goals of education be balanced between market-oriented/marketable skills versus other character-building/civics and ethics-oriented skills? • How do the goals in Table 5.1 in Rothstein and Jacobsen, from a survey carried out in 2005, compare with those in the 1918 The Cardinal Principles of Secondary Education? • Why do we have different instruments of government involvement in education vis-à-vis health care? • Why do we have different instruments of government involvement in various sectors of education itself?

27. Questions to think about (Contd.)(we’ll discuss them next week) • Answer Milton Friedman • The state of Ohio, for example, says to its citizens: "If you have a youngster who wants to go to college, we shall automatically grant him or her a sizable four-year scholarship, provided that he or she can satisfy rather minimal education requirements, and provided further that he or she is smart enough to choose to go to the University of Ohio. If your youngster wants to go, or you want him or her to go, to Oberlin College, or Western Reserve University, let alone to Yale, Harvard, Northwestern, Beloit, or the University of Chicago, not a penny for him." How can such a program be justified? Would it not be far more equitable, and promote a higher standard of scholarship, to devote such money as the state of Ohio wished to spend on higher education to scholarships tenable at any college or university and to require the University of Ohio to compete on equal terms with other colleges and universities ? • Milton Friedman, Capitalism and Freedom, 1962.