EC1103 Economics of Education

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EC1103 Economics of Education

• Professor Peter Dolton

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Why Study the Economics of Education?

• What will I earn when I graduate?
• Why do I have to have a student loan?
• Was it worth coming to university?
• Is my degree going to make me more productive?

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Why Study the Economics of Education?- More
Generally

• Maybe can explain Inequality
• Helps to Explain the Process of Economic Growth.
• Gives a framework for efficient and/or equitable
  resource allocation decisions about schools and
  university funding.

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Aims of this lecture

• Explain human capital theory and give an insight
  into the economics of education.
• Explain empirical specification for theory and
  examine evidence on the returns to education.
• Assess the Overeducation debate.
• Look at the link between Education and Inequality
• Examine what is the problem of Teacher Supply

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Outline of this lecture

• What is happening in the UK Education System?
• Human capital theory.
• Returns to education.
• Link between Education and Inequality
• The Overeducation debate.
• Problem of Teacher Supply

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1. What is happening in the UK Education System?
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Figure 1. Source Howard Glennester (2002).
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Full time Education Participation Over Time
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Gap in pupil performance between deprived and
non-deprived areas increases with each Key Stage
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Level 2 attainment at 15 (5 A-C GCSEs)
GCSE
SOURCE DfES
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The proportion of boys and girls achieving 5 good
GCSEs
Source DfES (2003)
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HE participation given prior attainment at 18
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OECD participation in education at 17 in 2002
Source OECD, 2004
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International comparisons of skills profiles
(Leitch Interim Report, 2005)
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2. Human Capital Theory
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Potential Earnings Streams Faced by a School
Leaver
A person who quits school at 16 can earn wHS
until retirement. If he decides to go to
college, he foregoes these earnings and incurs a
cost of H dollars for 3 years and then earns wCOL
until retirement .
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The Human Capital model

• Education is an Investment with a rate of return
  in the future.
• Real earnings (earnings adjusted for inflation)
• Age-earnings profile the wage profile over a
  workers lifespan
• The higher the discount rate, the less likely
  someone will invest in education (since they are
  less future oriented)
• The discount rate depends on
• The market rate of interest
• time preferences (how a person feels about
  giving up todays consumption in return for
  future rewards)

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Estimating the Rate of Return to Education

• Studies typically estimate a regression equation
  of the form
• ln wi ? ?Si ?Zi ?i
• where S denotes years of education.
• ? is typically interpreted as the marginal return
  to an additional year of education.
• But may produce a biased estimate of the true
  marginal rate of return.

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Education, Ability and Earnings
w
Z?
Abel
wA
Cain
wC?
wC
Z
Years of Education
SC
SA
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Endogeneity Bias
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Does Education Raise Worker Productivity?

• Education may serve as a signal of an
  individuals innate productivity.
• Employers may use educational attainment as a
  screening device to identify high productivity
  workers.
• In these circumstances, education may confer a
  high private rate of return but a relatively low
  social rate of return.

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Education as a Signal

CL
CH
wH
wL
Years of Education
S
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3. Rate of Return to Education.
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Estimating the Rate of Return to Education

• Studies typically estimate a regression equation
  of the form
• ln wi ? ?Si ?Zi ?i
• where S denotes years of education.
• ? is typically interpreted as the marginal return
  to an additional year of education.

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Returns to academic qualifications for males
Source Blundell, Dearden and Sianesi (2003)
Using NCDS Taking into account ability and family
background
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International evidenceCross Country Evidence on
the Returns to Schooling
Source Harmon, Westergard-Nielsen and Walker,
Education and earnings in Europe A cross country
analysis of the returns to education, 2001
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Rates of return for Tertiary and Upper-Secondary
Education
MALES (1999-2000)
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Rate of Return by Degree Subject compared to 2
A-levels. UK 1993-1999.
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4. Education and Inequality
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Trends in post-16 participation by SEG
SOURCE Youth Cohort Study
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Trends in HE participation by SEG
Source HESA, UCAS
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Participation in full-time education at age 16 by
Parents SEG and GCSE attainment
SOURCE Youth Cohort Study Cohort 10, Sweep 1
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GCSE attainment by ethnicity
Source DfES
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Source LFS, Spring 2000
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Education and WagesGB Employed Men and Women
aged 15-59 in FRS 1993/4-1996/7.
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Age and WagesGB Employed Men and Women aged
15-59 in FRS 1993/4-1996/7.
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Wage Differential Between College Graduates and
High School Graduates, 1963-2001 in the US.
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Figure 3c
Wages scale (pounds per week)

Scores scale
Reading test scale
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5. Overeducation?.
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Overeducation?
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6. The Market for Teachers.
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Use your head Teach
12 million ADVERTISEMENT CAMPAIGN TO ATTRACT
PROFESSIONALS INTO TEACHING

• Other incentives (amongst others)
• Golden hellos (October 1998)
• Interest free home loan (October 2003)

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The predicted probability of Graduates becoming a
teacher across cohorts.
Note Ind1 - Man, Arts, A-level10, 21 degree,
not in London
Source Chevalier, et al. (2001)
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UK Relative Teachers Wages1955-2000
Source Own calculations
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Age-Earning profilesMale teachers and
non-teachers
Source Calculated using DfES, NES, LFS data
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Age-Earning profilesFemale teachers and
non-teachers
Source Calculated using DfES, NES, LFS data
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Excess Demand of Teachers, by Sector in the UK,
1947-2000Teachers in service Demand for
teachers
Based on the number of children of school age and
the desired Pupil-teacher ratios
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Some Brief Conclusions

• Massive increase in educational participation.
• Evidence that the rate of return to education is
  still high with increasing returns to higher
  levels of skill.
• Increasing inequality of educational provision
  education differences still drive inequality.
• There is an issue with excess supply of
  graduates.
• The problem of teacher supply is relative wages.