Social Policy III Education

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Social Policy IIIEducation

• Dariusz Stanko, Ph.D.
• Department of Social Insurance
• www.sgh.waw.pl/katedry/kus

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Education and its definition(s)

• upbringing, teaching, science, process of
  acquiring knowledge, skills, learning.
• according to Wikipedia a notion related to
  intellectual development and knowledge of a man,
  applied in the following contexts
• process of acquiring knowledge at school or
  outside, Ministerstwo Edukacji Narodowej i
  Ministerstwo Nauki i Szkolnictwa Wyzszego.
• notion used for describing the level of knowledge
  of a particular person, society, nation. E. can
  be good, bad, (in) sufficient.
• upbringing (mainly intellectual)
• teaching, all processes aimed at passing on the
  knowledge, shaping character and particular
  skills.
• according to social policy activity (mainly) of
  the state, which aims to equalize educational
  chances of people at various stages of their
  development.

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Education as a human right

• The right to education has been described as a
  fundamental human right since 1952, Article 2 of
  the first Protocol to the European Convention on
  Human Rights obliges all signatory parties to
  guarantee the right to education. At world level,
  the United Nations' International Covenant on
  Economic, Social and Cultural Rights of 1966
  guarantees this right under its Article 13.

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Market for education - is it perfect?

• Standard market assumptions
• perfect information (prices, future)
• prefect competition (individuals price takers,
  equal power)

• Market failures
• public goods
• external effects
• increasing returns to scale

Source Barr (1998) chapter 4.
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State intervention

• regulation (quality of S, regulation of
  individual D)
• finance (subsidies, taxes, partial, total)
• public production (national defence, education
  etc.)

• indirect interference in the market mechanism
• income transfers

Source Barr (1998) chapter 4.
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Education public good? (1)

• Rules
• no competition
• free access
• no equivalency
• Zero margin costs. Usually mass consumption.

• A good that is non-rivalled and non-excludable.
  This means, respectively, that consumption of the
  good by one individual does not reduce
  availability of the good for consumption by
  others and that no one can be effectively
  excluded from using the good.(Source
  Wikipedia.eng).

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Education public good? (2)

• Classical public goods
• national defence, domestic security, money
• Pure public goods
• publicly financed
• Social goods (no classical) financed publicly or
  privately (private goods)
• Externalities

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Allocation of education (1)

• 1. Are particular social services public good?
• Universities teach, develop and preserve the
  culture, give skills indispensable for creative
  activity, form good citizens, etc.
• Socrates studying an aim itself. Is it a public
  good?
• 2. Defining something as an economic good
  influences whether SP deals with it or not. SP
  allocation of goods according to the following
  rules

• efficiency,
• goodness,
• justice,
• and/or other rules (equity).

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Allocation of education (2)

• 3. Problems with quantification of basic
  elements determining SP.
• What to produce, how much, importance of each
  educational products.
• 4. How to define the relationship between
  benefits/production and costs.
• normative economics costs issue
• positive economics benefits/effects issue
• There is a danger of focusing too much on the
  measurable aspects at the cost of immeasurable
  (cost of education vs. social values).

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Allocation of education (3)

• Costs or values?
• Costs important even in cases motivated on purely
  moral grounds
• Conflicting choice of ideas
• Conflict between moral imperatives (freedom,
  minimal quality of life, privacy) and need for
  the choice.
• Cost-benefit analysis
• Not particularly good at aggregate level (social
  preferences). Quite good at lower levels
  (projects).
• Social services
• Similarities need for allocation, need for
  institutions, production is decided not by the
  individuals but by arbitral methods of
  cost-benefit analysis.
• Differences nature of the services, different
  externalities

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Human capital (1)

• At the beginning associated with labour,
  homogeneous, easily replaceable
• Knowledge differs from other production factors
  because it is
• expansive and self-generating (intelligence,
  experience)
• transferable and divisible

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Human capital (2). Chicago school
Becker, G. (1964). Human Capital. Columbia
University Press New York. Blaug, M. (1972). An
Introduction to the Economics of Education,
Penguin Harmondsworth.

• similar to other physical factors of production
• can be invested in (education, training,
  curing)
• factor of income for a particular person
  (asset interest rate)
• substitutional but not in 100
• specific capital vs general capital (useful
  for a particular employer or for everyone)

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Human capital (3). Modern economics

• Critique of the Chicago school
• income differences not everything can be
  explained by differences in human capital
• too general (character, connections, prestige,
  university)
• value of SGH trademark?
• Japanese Tokyo experiment (1969, Kim and Okita
  2004, Ma and Kawaguchi, 2006)
• theory of human capital development
• social capital (social contacts, trust)
• instructional capital (knowledge to share with
  others)
• individual capital (leadership, creativeness,
  morality)

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Education production function (1)

• Problem with setting the production(what, how
  much and how to produce)
• Complex input variables (facilities at school,
  number and quality of teachers, materials, books,
  studying time, environment etc.)

• Relationship between level of education and
  economic growth Denison (1962, 1967)

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Education production function (2)

• Cobb-Douglas function (income constant with
  regard to inputs)

Q aNaKß (aß1) N amount of personhour work
(labour) K amount of machinehour work (capital)

• a, ß production elasticises with regard to
  changes in N and K

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Education production function (3)
a, ß measure relative share of N and K in
production, under the assumption that these
factors receive their remuneration equal to their
marginal production. Marginal products of N and
K
Total amount of production Q received by N s.t.
paying personhour salary equal to their marginal
productivity equals to
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Education production function (4)
and the amount of production that goes to owners
of the capital K is equal
Since1 , and QßQQ and labour and capital
shares receive full production.
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Education production function (5)

• Taking logarithm of Cobb-Douglas function, one
  receives the rate of growth of national capital
  (dots over variables represent the pace of
  change, i.e. logarithms)

where a, ß are shares of labour and capital in
the income
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Education production function (6)

• It is possible to measure the growth rate of
  changes in Q, N i K, while a with dot represents
  residual value which is neither explained by
  changes in labour nor capital. It is more or less
  2/3 of the share in production.
• Table 9.1/236 Contributions to growth of GDP...
• Denison residual value due to higher education.
  Great importance of improvements in education
  (alphas elasticity)

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Education vs income (1)

• Denison believed that great part of residual
  value was related to higher education of labour.
• Improvement of education has strong impact on
  incomes since the elasticity of production with
  regard to labour (alpha) is much higher than the
  corresponding elasticity of capital (beta).
• ...however, there are also some other factors ?

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Education vs income (2)

• Other factors that generate the income
• genetic abilities
• parents socio-economic status
• parents income
• race
• sex
• degree of unionization
• experience
• motivation
• risk aversion
• ...luck

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Education vs income (3)

• Wolfle and Smith (1956) 2/3 of income
  differences of university and upper secondary
  school graduates can be statistically attributed
  to additional education, when differences in
  fathers profession, secondary school ranking and
  IQ are controlled (Denison, 1964). Similarly -
  Becker (Human Capital, 1964, page 87).

Salary differences due to
Denison Bowles (1973) Jenks
(1972) P/L - upper sec.school ranking
6 - IQ 3 4 - fahters profession
7 - socio-economic status 57 -
education much 39 20 46
P/L Psacharopoulos and Layard (1979, str. 495)
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Education vs income (4)

• Screening hypothesis screening device for
  selecting skilled ones
• Arrow, K.J. (1973) Higher education as a
  filter, Journal of
• Public Economics 2 193-216
• Difficult to verify what about so-called
  drops-out?
• Thus education indeed increases productivity

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Education as an investment (1)

• Education increases salaries/income
• Model assumptions
• 1) a person maximise its lifetime earnings)
• ? non-monetary benefits, so estimated rate of
  return will be lower than the actual one
• ? number of labour hours is set up exogenously
  (there are some other things to do in life apart
  from working to maximise lifetime earnings)
• 2) there is no education having completed a
  school, so constant salary.
• 3) everyone has equal access to capital markets
  and identical basic skills
• 4) no work while studying, no study during
  working career.

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Education as an investment (2)

• Example average rate of return from additional
  three years of study (undergraduate) for a person
  that will work for next 47 years

C- direct costs of education, per year Ef
foregone salary due to education, per year Es
higher salary due to education, per year r
discount rate
First part of the equation PV (increase of
salary), Second part of the equation PV (cost
of education)
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Education as an investment (3)

• Private rate of return
• Costs and benefits of an individual, i.e. Es and
  Ef represents salaries net of income tax, C
  cost of education with donations and subsidies.
  This rate describes incentives for the individual
  to study and takes into account financing of
  education.

Social rate of return Takes into account taxes
and subsidies but usually does not account for
non-monetary (non-pecuniary) externalities. This
rate is important for social choices.
Average rates of return vs. marginal rates of
return
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Education as an investment (4)

• Table 9.2/ 240 Social Rates of Return...
• Usually there are lower than private rates of
  return because the additional income tax of
  higher earners is lower than subsidy given for
  their education and because they do not account
  for externalities.

Table 9.3/240 - Social and Private Rates of
Return ...Education is not a homogeneous
process, so difficult to calculate its
profitability with regard to length of schooling,
c.f. table 9.3/ 240..
Developed countriesrate of return from education
gt rate of return from capital Developing
countries both rates higher than in developed
countries
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Private rates of return from upper secondary and
tertiary educations (OECD 2007)
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Education and externalities

• Non-pecuniary benefits important as well
  (artists, priests, specialised scientists)

Difficult to assess size of such externalities
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How much coercion in education?

• Common belief that there should be some level of
  obligatory participation regarding primary
  education and free access to higher levels of
  education (Rawls-like way of thinking).

• Common agreement
• basic education imposed on all children
• consumption of such compulsory education should
  be for free
• such education should contain elements of
  development at least at minimal level
• each education is somehow subsidized but
  externalities only are not enough argument for
  involvement of the State in its production

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Financing education

• scholarships
• education vouchers
• student loans

Education services - lowering the market price
(sometimes to zero) by subventions or -
increasing purchasing power of consumers by
granting scholarships, vouchers or loans.
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Challenges for equity in education

• fairness making sure that personal and social
  circumstances are not obstacle to achieving
  educational potential
• inclusion ensuring a basic minimum standard of
  education

• Three key policy areas
• the design of education systems
• practices in and out of school
• way resources are allocated

Source OECD (2008), Ten Steps to Equity in
Education.
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How social background affect performance in
mathematics (2003)Relative chances of students
in lowest and highest socio-economic group ending
up with very poor (below or at Level 1)
performance in mathematics
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How many students struggle with
readingPercentage of students below and at Level
1 of proficiency in the OECD PISA reading scale2
(2003)
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Equity in education OECD recommendations

• Design
• 1. Limit early tracking and streaming and
  postpone academic selection.
• 2. Manage school choice so as to contain the
  risks to equity.
• 3. In upper secondary education, provide
  attractive alternatives, remove dead ends and
  prevent dropout.
• 4. Offer second chances to gain from education.
• Practices
• 5. Identify and provide systematic help to those
  who fall behind at school and reduce year
  repetition.
• 6. Strengthen the links between school and home
  to help disadvantaged parents help their children
  to learn.
• 7. Respond to diversity and provide for the
  successful inclusion of migrants and minorities
  within mainstream education.
• Resourcing
• 8. Provide strong education for all, giving
  priority to early childhood provision and basic
  schooling.
• 9. Direct resources to the students with the
  greatest needs.
• 10. Set concrete targets for more equity,
  particularly related to low school attainment and
  dropouts.

Source OECD (2008), Ten Steps to Equity in
Education.