Givology Staff's Blog

The Economics of Education

- Written by Priyanka deSouza
[font=Georgia, Utopia, 'Palatino Linotype', Palatino, serif]In his book, ‘The Economics of Education’, Daniele Checchi provides enrollment ratios in primary school education systems across the world. This indicator shows that post World War 2, an increase in school attendance is observed across the globe. By the start of the 1990s, many countries had succeeded in achieving 100% primary school enrollment rate. However, while OECD countries saw an almost complete saturation for secondary education as well, all the others were lagging behind. [/font]
[font=Georgia, Utopia, 'Palatino Linotype', Palatino, serif]Why is this so, given the clear benefits of education? [/font]
[font=Georgia, Utopia, 'Palatino Linotype', Palatino, serif]Evidence presented by Dr. Checchi indicates that labour market participation increases dramatically as people obtain more and more education. Interestingly, the book states that employment rates of university graduates are much the same across all countries: 90% for males, and 70% for females in most developed countries, as opposed to 70% of men and 40% of women in the case of less than compulsory education. [/font]
[font=Georgia, Utopia, 'Palatino Linotype', Palatino, serif]Why is labour participation more? [/font]
[font=Georgia, Utopia, 'Palatino Linotype', Palatino, serif]Education is seen to be positively correlated with earnings, with female profiles consistently below male ones.(It is interesting to note that there is little direct empirical evidence of direct productivity gains from more education. Daniele Checchi notes however, that any explanation of the above would preclude the very real barriers of accessing education)[/font]
[font=Georgia, Utopia, 'Palatino Linotype', Palatino, serif]If it is worth going to school, and there has been an increase in access to education across the globe, what prevents full access to education? [/font]
[font=Georgia, Utopia, 'Palatino Linotype', Palatino, serif]The sad truth is, the rise in educational attainment has not led to a proportionate decrease in inequality. Lots of people still do not have access to school. In addition, it is important to recognize the distinction between ownership and utility. Although primary education is compulsory in most parts of the world, statistics show that this does not directly translate to attaining competence in literacy abilities. And even though it is compulsory, economists have noted a negative correlation between female primary enrollment and family wealth, indicating that financial resources still preclude girls from attending school.[/font]
[font=Georgia, Utopia, 'Palatino Linotype', Palatino, serif]There have been more detailed analyses of the above question in the book: ‘The Economics of Education’. Opting to obtain more education has been seen as an investment question by some economists. The analogy between physical capital and human capital is imperfect as human capital cannot be resold, nor can it be collateralized. This means that the future benefits of acquiring education are conditional on events in the future, and the effort that must be exerted to obtain a job in the future. Thus, from this point of view this investment appears risky from the point of view of parents who have to make this choice. [/font]
[font=Georgia, Utopia, 'Palatino Linotype', Palatino, serif]In spite of this, ‘investment in human capital’ has become synonymous with the ‘acquisition of more education’. Human capital theory predicts that the demand for education will stabilize when the incremental benefits equal the incremental costs. Two factors have been identified to contribute to the costs, and thus the different levels of educational attainment: 1) Talent, 2) Family wealth which can constrain poor families when financial markets are imperfect[/font]
[font=Georgia, Utopia, 'Palatino Linotype', Palatino, serif]From an efficiency point of view, it is best to deploy more resources to the more talented students, however from an equity perspective this action would be wrong. However, if different levels of educational achievement were a result of income inequality then redistributive policies would increase both efficiency and equity. A further level of complexity in this analysis is added by studies that show a positive correlation between IQ scores and earnings, and between IQ scores across generations. If IQ is seen to be a proxy for ‘talent’, and if the gene of intelligence is supposed to be randomly distributed; then income inequality appears to be the ‘inevitable’ result. However, literature is still inconclusive about this point as many authors are against a causal interpretation.[/font]
[font=Georgia, Utopia, 'Palatino Linotype', Palatino, serif]If we examine the family wealth factor, we see that real financial markets typically ration borrowers by charging higher interest rates/require collateral in order to insure themselves against the risk of default. This makes it impossible for poor people to borrow money, and bear the opportunity cost of attending school. Thus poor individuals tend to acquire less education than rich individuals. Thus it has been argued that imperfect financial markets are responsible for inequality in education and income. This could lead to persistent inequality- poor families are unable to finance their children's education, who thus obtain less education, earn less and are thus unable to finance their children's education.[/font]
[font=Georgia, Utopia, 'Palatino Linotype', Palatino, serif]To summarize this, if children were heterogeneous in ability, more talented children will benefit more from schooling, thus stay longer in school and thus earn more money. However, when children are heterogeneous in family income, and financial markets are imperfect. children from poor families obtain less education because they face higher costs. These ‘elitest’ and ‘egalitarian’ views coexist.[/font]
[font=Georgia, Utopia, 'Palatino Linotype', Palatino, serif]Why have I written this article?[/font]
[font=Georgia, Utopia, 'Palatino Linotype', Palatino, serif]‘Fixing’ the education system is not easy. There are a multitude of factors at play. It is to be hoped that reading this article, some of the factors will become more clear, and more visible and can thus be tackled accordingly.[/font]

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