McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 34

Education

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Chapter Outline

• Investments In Human Capital

• Should We Spend More?• School Reform Issues• College And University

Education

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Investments in Human Capital• Human Capital: the ability of a

person to create goods and services• An education is an investment like any

other.• You incur costs early• You reap rewards later

• Any investment only makes economic sense if the net present value (the present value of the benefits minus the present value of the costs) is positive.

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Why “Free” Public Schools are not “Free”

• Taxpayers pay $650 billion in taxes to support the system.

• Some states and school districts have fees (such as textbook rental) that parents must pay.

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Analyzing the Education Decision

• If parents had to pay the entire cost of K-12 education and chose not to send their children to school they would still incur daycare costs for their smaller children.

• Parents would then compare the present value of benefits to the present value of the tuition costs minus daycare costs.

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Why “Free” Public School Makes Economic Sense

• The external benefits (the benefits to the rest of society that result from a child being educated) are such that the efficient price is zero.

• External benefits include• the social stability that is enhanced by

providing opportunity for all to succeed.• the more intelligent voting population.• the greater tax base associated with higher

incomes.• Lower crime rates

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Modeling External Benefits

Social Benefit

External Benefits

0Enrolled Students

D

S

Tuition

T*

S*

T’

S’

What Schools Get

What Parents Pay

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Should We Spend More?

• What we get for our $650 billion in tax money• More real spending per student• Lower student-teacher ratios• Flat to declining SAT Verbal

(recently rising SAT Math)• Increasing high school graduation

rates

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More Per Student Spending (2008 Dollars)

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Lower Student-Teacher Ratios

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SATs

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Increased High School Graduation Rates

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Cautions Against Quick Conclusions

• Much of the increased spending has gone for• Noninstructional spending (e.g. Janitors,

secretaries, administration) • Special education spending (more than 10%

of students now qualify for special services)

• Some of the decline in SATs comes from more (and less academically prepared) students taking the exams.

• Some of the increase is graduation rates comes from GEDs, and social promotion.

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The Economic Literature on Education Spending

• Economists have studied the relationship between student success and spending. The majority show little relationship. • Measures of success• Graduation rates, standardized test scores

• Inputs• Student-teacher ratios• Teacher degree attainment• Teacher salaries

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The Education Production Function

Test Scores

Teacher Quality/Quantity

Education Production Function

The flat of the curve. The argument is that inthis range more spendingdoes not increase scores.

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School Reform Issues• The public school as a monopoly• Lack of competition makes all monopolies less cost- and

quality-conscious.

• The existence of tenure (the job protection for teachers with experience) and the lack of merit pay• Tenured teachers are difficult to fire for poor teaching

and good teachers are rarely paid more than poor ones. • Evidence indicates quality teaching matters, but without

merit pay, you can not use money to attract it.

• Private vs. Public Education and Vouchers• Creating competition would stimulate cost and quality

consciousness. Evidence is mixed.

• Collective Bargaining• In most states teachers can bargain collectively and

typically have relatively good (expensive) pensions.

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The Flight of Bright Women from Teaching

• With gender equality in hiring across more areas of employment, teaching is less attractive to bright women.

• Evidence suggests that • fewer bright women are choosing

education majors in college.• more ‘less bright’ women are choosing

education majors in college.

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College and University Education

• Costs are higher than K-12• Teachers spend less time in the

classroom• 6 to 12 hours per week• Spend time on research, committees,

keeping up with the latest in their fields.

• Equipment and lab costs are substantially higher.

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More College Graduates

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What is a College Degree Worth?

• Present Value of Costs• Opportunity costs of lost work time• Tuition• (not living expenses…you have to eat)

• Present Value of Benefits• Increased expected earnings over a lifetime

• Net Present Value• Estimates vary between $300,000 and

$500,000 for the positive net present value