The Social Value of Education

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The Social Value of Education

• Robert Topel
• University of Chicago

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• Economists (and others) have generally had
  little success in estimating the social effects
  of different investments, and, unfortunately,
  education is no exception.
• Becker, Human Capital (1975)

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Social vs. Private Returns

• The private, monetary return to education is one
  of the most widely studied empirical magnitudes
  in economics
• Consensus returns are substantial
• Appx. 8-15 per year of schooling
• 4 years of college raises earnings by about 65,
  or a return of over 13/year
• Why is public funding virtually universal?

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Externalities

• When education of one individual confers external
  benefits (costs) on others, there is a positive
  economic case for encouraging (discouraging)
  education
• Private return to schooling may understate the
  full social benefit of education

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A Taxonomy

• Private Social
• Education benefits only the individual
• No compelling case for public participation
• Private lt Social
• Individuals education benefits others
• Public expenditure can enhance efficiency
• Private gt Social
• Education merely redistributes from poor to rich

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Elements of Private Returns

• Increased individual market productivity
• Improved non-market productivity
• Home productivity
• Consumption decisions
• Production of childrens human capital
• Improved health longevity
• Education as consumption
• Enables consumption of HK goods (ideas)
• Matching assortive mating

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Elements of Social ReturnsPrivate lt Social

• Social network externalities in production
• Education raises the level of economic activity
  by more than its private return
• Education economic growth
• The level of education raises economic growth
  because educated people produce ideas
• External benefits through social programs
• Health
• Other income transfers
• Equity as a public good

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Private lt Social(Cont)

• Crime
• Network externalities in consumption
• Voting
• Other 2nd best considerations
• Distorted incentives to invest
• Progressive taxes
• Artificial compression of skill differentials

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Elements of Social ReturnsPrivate gt Social

• Signaling value of education
• Education as a screening device
• Private value as a signal, even if no impact on
  productivity
• No social gain

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Measuring Private Returns A Primer

• To calibrate social returns, we need a benchmark
  estimate of the size of private returns
• Micro-data on wages, schooling, experience
• Assume
• only cost is foregone earnings
• increase constant over lifetime
• Rate of return is increase in earnings

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Measuring Private Returns (cont)

• lnWi Xiß Si? ei
• Si is years of schooling for person i
• ? is private monetary rate of return
• Versions estimated world-wide
• Returns 5-15
• Comparable to returns on other risky assets
• Sources of bias empirically unimportant

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Difference in Log Average Wages College and High
School Graduates, 1963-2000
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Changes in the Price of Skill
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Rising Returns Implications for Social Policy

• Rising returns gt increased scarcity of skills
• Social policies that combat inequality may
  exacerbate the problem
• Artificial compression of wage distribution
• Tax policies
• Income redistribution
• Paradox Public expenditure as 2nd Best
  solution to encourage investment
• Sweden
• Australia

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Sweden Reduced Returns Reduced Investment
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Response of Investment
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Educational Externalities

• Private returns as a benchmark
• E.g. if private (Mincerian) return to a year of
  schooling is 10, does the social return exceed
  10?
• What are the sources of social returns?
• How could we measure them?
• Focus here productivity and income

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Sources of Externalities

• Higher level of productivity
• E.g. Lucas (1988)productive ideas from social
  interactions
• Productivity of cities
• Growth of education leads to growth in output
• Growth effect exceeds private return
• Higher growth of productivity
• Education as producer of ideas
• Level of education leads to growth of output

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Growth Accounting and Social Returns

• Output per worker in country j
• With CRS

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Schooling and Growth

• Tractable model of schooling and growth
• is the social return to
  schooling private plus external benefits
• Is the impact of schooling on national output
  larger than its impact on individual?

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Alternative Approach States and Cities

• Does greater average education in an area raise
  individual earnings, after controlling for
  individual education?
• Is ? If yes, then taken as evidence of
  external benefits from education
• Estimates are all over the map

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Study Data Geogr. Unit Instrument ßE
Rauch (1993) Census 1980 SMSA OLS 2.8-5.1
Acemoglu and Angrist (2000) Census 1950-1990 State Compulsory Schooling Laws, Quarter of Birth 0.4
Moretti (various) NLSY 1979, Census 1980-1990 SMSA Age Structure, Land Grant College, Plant opening 20-25
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Education and Growth of States

• Relative growth of U.S. statespattern of
  convergence
• Two issues
• Has growth in education contributed to economic
  growth of states? (Yes)
• Has growth of education produced spillovers
  that raised total productivity by more than the
  private returns to schooling? (Maybe)

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IV (1950-2000, using 1940 values) -0.62 (0.08)
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IV (1950-2000, using 1940 values) -0.83 (0.05)
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OLS 0.22 (0.03)
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Interpretation of the Evidence

• Data suggest that education drives growth, and
  that social return substantially exceeds the
  private return
• Yet growth in education may be correlated with
  other, unmeasured, factors that contribute to
  productivity
• Unobserved talent
• Changes in demand for skills
• Quality of education

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Deeper Look at the Data

• Isolate Total Factor Productivity as local effect
  on wages
• Control for environmental factors affecting
  skills of workers using state of birth
• Controls for differences in skills or quality by
  birth state and cohort

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2-Stage Analysis

• First Stage
• (X Education and Experience Indicators)
• Second Stage

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Education and Productivity Growth U.S. States 1940-2000 Education and Productivity Growth U.S. States 1940-2000 Education and Productivity Growth U.S. States 1940-2000 Education and Productivity Growth U.S. States 1940-2000 Education and Productivity Growth U.S. States 1940-2000 Education and Productivity Growth U.S. States 1940-2000 Education and Productivity Growth U.S. States 1940-2000 Education and Productivity Growth U.S. States 1940-2000 Education and Productivity Growth U.S. States 1940-2000
10 yr growth 10 yr growth 20 yr growth 20 yr growth 30 yr growth 30 yr growth 60 yr growth 60 yr growth
.046 (.017) .026 (.018) .068 (.019) .040 (.021) .067 (.017) .036 (.020) .081 (.021) .023 (.024)
1.23 (0.44) 1.08 (0.40) 1.01 (0.34) 1.35 (0.38)
R2 .894 .897 .952 .954 .978 .980 .248 .415
Includes Year FE. No overlapping periods. Figures
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Social Returns to Schooling Where Do We Stand

• Evidence for excess social returns is, at best,
  mixed
• Impact of education on TFP is greatly reduced
  when growth of other skills is accounted for
• But evidence does indicate that social returns in
  economic growth are at least as large as private
  ones
• Important contributor to convergence in incomes
  and welfare

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Other Issues

• Local investments in higher education
• Empirical evidence on the signaling hypothesis