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Education economics

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Title: Education economics  
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Education economics

Education economics or the economics of education is the study of economic issues relating to education, including the demand for education and the financing and provision of education. From early works on the relationship between schooling and labor market outcomes for individuals, the field of the economics of education has grown rapidly to cover virtually all areas with linkages to education.


  • Education as an investment 1
    • Investment costs 1.1
    • Returns on investment 1.2
    • Effects on productivity 1.3
  • Demand for education 2
    • Liberal approaches 2.1
    • Marxist critique 2.2
  • Financing and provision 3
  • Education production function 4
  • See also 5
  • Notes 6
  • References 7
  • Further reading 8
  • External links 9

Education as an investment

Economics distinguishes in addition to physical capital another form of capital that is no less critical as a means of production – human capital. With investments in human capital, such as education, three major economic effects can be expected:[1]

  • increased expenses as the accumulation of human capital requires investments just as physical capital does,
  • increased productivity as people gain characteristics that enable them to produce more output and hence
  • return on investment in the form of higher incomes.

Investment costs

Investments in human capital entail an investment cost, just as any investment does. Typically in

  • Economics of Education Review Description & links to article titles.
  • Education Economics Aims & Scope & links to article titles.
  • World Bank, "Economics of Education"
  • OECD's Education GPS: a review of education policy analysis and statistics.

External links


Further reading

  • "education in developing countries" by Paul Glewwe. Abstract.
  • "human capital, fertility and growth" by Oded Galor. Abstract.
  • "intergenerational transmission" by Lance Lochner.Abstract.
  • "local public finance" by John M. Quigley. Abstract.
  • "population health, economic implications of" by David Canning and David E. Bloom. Abstract.

Selected entries on education from The New Palgrave Dictionary of Economics, 2008), 2nd Edition:

  • Roland Bénabou, 1996."Heterogeneity, Stratification, and Growth: Macroeconomic Implications of Community Structure and School Finance," American Economic Review,86(3) p p. 584- 609.
  • Mark Blaug, 1985. "Where Are We Now in the Economics of Education?" Economics of Education Review, 4(1), pp. 17–28. Abstract.
  • Clive R. Belfield, ed., 2006.Modern Classics In The Economics Of Education, Elgar. Description.
  • Eric A. Hanushek, 1986. "The economics of schooling: Production and efficiency in public schools." Journal of Economic Literature 24, no. 3 (September): 1141-1177.
  • Eric A. Hanushek, 1992. "The Trade-off between Child Quantity and Quality," Journal of Political Economy, 100(1), p p. 84-117.
  • Stephen A. Hoenack, 1996. "The Economics of Education in Developing Countries: An Assessment of the State of the Art," Economics of Education Review, 15(4), pp. 327–338. Abstract.
  • Caroline M. Hoxby, 1999. "The Productivity of Schools and Other Local Public Goods Producers," Journal of Public Economics, 74(1), pp. 1–30 Abstract.
  • _____, 2000. "Does Competition among Public Schools Benefit Students and Taxpayers?" American Economic Review, 90(5), p p. 1209- 1238.
  • Geraint Johnes and Jill Johnes, ed., 2004. International Handbook on the Economics of Education, Elgar. Chapter titles.
  • George Psacharopoulos and Harry A. Patrinos, 2004. "Returns to Investment in Education: A Further Update," Education Economics, 12(2), pp. 111–134. Abstract.
  • Steven G. Rivkin, Eric A. Hanushek, and John F. Kain, 2005. "Teachers, Schools, and Academic Achievement," Econometrica, 73(2), pp. 417–458. Abstract.
  • Sherwin Rosen, 1987. "human capital," The New Palgrave: A Dictionary of Economics, v. 2, pp. 681–90.


  1. ^ a b c d  
  2. ^ Eurostat (2008). "5% of EU GDP is spent by governments on education". Statistics in Focus 117/2008. 
  3. ^ Kendrick, J. (1976). The Formation and Stocks of Total Capital. New York: Columbia University Press.  
  4. ^ Eurostat (2008). "GDP expenditure and investment". 
  5. ^  
  6. ^ Daniele Checchi, 2006. The Economics of Education: NYUMBANI Human Capital, Family Background and Inequality, Cambridge. ISBN 0-521-79310-6 ISBN 978-0-521-79310-0 Description.
  7. ^ David Card "returns to schooling," The New Palgrave Dictionary of Economics , 2nd Edition. Abstract.
  8. ^ Kling, Arnold and John Merrifield. 2009." Goldin and Katz and Education Policy Failings in Historical Perspective". Econ Journal Watch 6(1): 2-20.[1]
  9. ^ Johannes Hörner, 2008. "signalling and screening." The New Palgrave Dictionary of Economics, 2nd Edition, Abstract.
  10. ^ a b Douglas Kellner, Marxian Perspectives on Educational Philosophy: From Classical Marxism to Critical Pedagogy
  11. ^ William A. Fischel, 2008. "educational finance," The New Palgrave Dictionary of Economics, 2nd Edition. Abstract.
  12. ^ Caroline Hoxby, 2008. "school choice and competition," The New Palgrave Dictionary of Economics, 2nd Edition, Abstract.
  13. ^ Daniele Checchi, 2006. The Economics of Education: Human Capital, Family Background and Inequality, ch. 5, "Education Financing."
  14. ^ Coleman, James S., Ernest Q. Campbell, Carol J. Hobson, James McPartland, Alexander M. Mood, Frederic D. Weinfeld, and Robert L. York. 1966. Equality of Educational Opportunity. Washington, D.C.: U.S. Government Printing Office.
  15. ^ Eric A. Hanushek, 2008. "education production functions," The New Palgrave Dictionary of Economics , 2nd Edition. Abstract.
  16. ^  
  17. ^ Gary Burtless, ed., 1996. Does Money Matter? The Effect of School Resources on Student Achievement and Adult Success. Washington, D.C.: The Brookings Institution. Description and scroll to chapter preview links.
  18. ^ Greenwald, Rob;  
  19. ^ Hanushek, Eric A. (1996). "A More Complete Picture of School Resource Policies". Review of Educational Research 66 (3): 397–409.  
  20. ^ Lawrence Mishel, and Richard Rothstein, eds., 2002. The Class Size Debate. Link. Washington, DC: Economic Policy Institute.
  21. ^ Ehrenberg, Ronald G., Dominic J. Brewer, Adam Gamoran, and J. Douglas Willms, 2001. "Class size and student achievement," Psychological Science in the Public Interest, 2(1), pp. 1-30.
  22. ^ Nye, B.; Hedges, L. V.; Konstantopoulos, S. (2000). "The Effects of Small Classes on Academic Achievement: The Results of the Tennessee Class Size Experiment". American Educational Research Journal 37 (1): 123–151.  


See also

A large number of successive studies, increasingly involving economists, produced inconsistent results about the impact of school resources on student performance, leading to considerable controversy in policy discussions.[15][16] The interpretation of the various studies has been very controversial, in part because the findings have directly influenced policy debates. Two separate lines of study have been particularly widely debated. The overall question of whether added funds to schools are likely to produce higher achievement (the “money doesn’t matter” debate) has entered into legislative debates and court consideration of school finance systems.[17][18][19] Additionally, policy discussions about class size reduction heightened academic study of the relationship of class size and achievement.[20][21][22]

An education production function is an application of the economic concept of a production function to the field of education. It relates various inputs affecting a student’s learning (schools, families, peers, neighborhoods, etc.) to measured outputs including subsequent labor market success, college attendance, graduation rates, and, most frequently, standardized test scores. The original study that eventually prompted interest in the idea of education production functions was by a sociologist, James S. Coleman. The Coleman Report, published in 1966, concluded that the marginal effect of various school inputs on student achievement was small compared to the impact of families and friends.[14] Later work, by Eric A. Hanushek, Richard Murnane, and other economists introduced the structure of "production" to the consideration of student learning outcomes.

Education production function

In most countries school education is predominantly financed and provided by governments. Public funding and provision also plays a major role in higher education. Although there is wide agreement on the principle that education, at least at school level, should be financed mainly by governments, there is considerable debate over the desirable extent of public provision of education. Supporters of public education argue that universal public provision promotes equality of opportunity and social cohesion. Opponents of public provision advocate alternatives such as vouchers.[11][12][13]

Financing and provision

Although Marx and Engels did not write widely about the social functions of education, their concepts and methods are theorized and criticized by the influence of Marx as education being used in reproduction of capitalist societies. Marx and Engels approached scholarship as "revolutionary scholarship" where education should serve as a propaganda for the struggle of the working class.[10] The classical Marxian paradigm sees education as serving the interest of capital and is seeking alternative modes of education that would prepare students and citizens for more progressive socialist mode of social organizations. Marx and Engels understood education and free time as essential to developing free individuals and creating many-sided human beings, thus for them education should become a more essential part of the life of people unlike capitalist society which is organized mainly around work and the production of commodities.[10]

Marxist critique

An alternative model of the demand for education, commonly referred to as screening, is based on the economic theory of signalling. The central idea is that the successful completion of education is a signal of ability.[9]

Educational advance is not the only variable for economic growth, though, as it only explains about 14% of the average annual increase in labor productivity over the period 1915-2005. From lack of a more significant correlation between formal educational achievement and productivity growth, some economists see reason to believe that in today’s world many skills and capabilities come by way of learning outside of tradition education, or outside of schooling altogether.[8]

Statistics have shown that countries with high enrollment/graduation rates have grown faster than countries without. The United States has been the world leader in educational advances, beginning with the high school movement (1910–1950). There also seems to be a correlation between gender differences in education with the level of growth; more development is observed in countries which have an equal distribution of the percentage of women versus men who graduated from high school. When looking at correlations in the data, education seems to generate economic growth; however, it could be that we have this causality relationship backwards. For example, if education is seen as a luxury good, it may be that richer households are seeking out educational attainment as a symbol of status, rather than the relationship of education leading to wealth.

The dominant model of the demand for education is based on human capital theory. The central idea is that undertaking education is investment in the acquisition of skills and knowledge which will increase earnings, or provide long-term benefits such as an appreciation of literature (sometimes referred to as cultural capital).[6] An increase in human capital can follow technological progress as knowledgeable employees are in demand due to the need for their skills, whether it be in understanding the production process or in operating machines. Studies from 1958 attempted to calculate the returns from additional schooling (the percent increase in income acquired through an additional year of schooling). Later results attempted to allow for different returns across persons or by level of education.[7]

Liberal approaches

Demand for education

Positive externalities from human capital are one explanation for why governments are involved in education. If people were left on their own, they would not take into account the full social benefit of education – in other words the rise in the output and wages of others – so the amount they would choose to obtain would be lower than the social optimum.[1]

Finally, the matter of externalities should be considered. Usually when speaking of externalities one thinks of the negative effects of economic activities that are not included in market prices, such as pollution. These are negative externalities. However, there are also positive externalities – that is, positive effects of which someone can benefit without having to pay for it. Education bears with it major positive externalities: giving one person more education raises not only his or her output but also the output of those around him or her. Educated workers can bring new technologies, methods and information to the consideration of others. They can teach things to others and act as an example.

To distinguish the part of GDP explained with education from other causes, Weil[1] has calculated how much one would expect each country’s GDP to be higher based on the data on average schooling. This was based on the above-mentioned calculations of Hall and Jones on the returns on education. GDPs predicted by Weil’s calculations can be plotted against actual GDPs, as is done in the figure on the left, demonstrating that the variation in education explains some, but not all, of the variation in GDP.

Economy-wide, the effect of human capital on incomes has been estimated to be rather significant: 65% of wages paid in developed countries is payments to human capital and only 35% to raw labor.[1] The higher productivity of well-educated workers is one of the factors that explain higher GDPs and, therefore, higher incomes in developed countries. A strong correlation between GDP and education is clearly visible among the countries of the world, as is shown by the upper left figure. It is less clear, however, how much of a high GDP is explained by education. After all, it is also possible that rich countries can simply afford more education.

Effects on productivity

Predicted versus actual GDP per worker. The figure shows how much one would expect each country’s GDP to be higher based on the data on average years of schooling

Human capital in the form of education shares many characteristics with physical capital. Both require an investment to create and, once created, both have economic value. Physical capital earns a return because people are willing to pay to use a piece of physical capital in work as it allows them to produce more output. To measure the productive value of physical capital, we can simply measure how much of a return it commands in the market. In the case of human capital calculating returns is more complicated – after all, we cannot separate education from the person to see how much it rents for. To get around this problem the returns to human capital are generally inferred from differences in wages among people with different levels of education. Hall and Jones have calculated from international data that on average that the returns on education are 13.4% per year for first four years of schooling (grades 1–4), 10.1% per year for the next four years (grades 5–8) and 6.8% for each year beyond eight years.[5] Thus someone with 12 years of schooling can be expected to earn, on average, 1.1344 × 1.1014 × 1.0684 = 3.161 times as much as someone with no schooling at all.

Returns on investment

Average years of schooling versus GDP per capita (USD 2005).

Thus the two are of similar magnitude. [4] Including opportunity costs investments in education can be estimated to have been around 10% of GDP in the EU countries in 2005. In comparison investments in physical capital were 20% of GDP.[3]

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