ECONOMICS OF SOCIAL

POLICY: EDUCATION
AIMS
 The Ultimate aim of any education system is to attain Good
Educational Outcomes.
 Good Educational Outcomes involve both the transmission of academic
skills (literacy, numeracy) AND the transmission of social values.
 Analogous to the Health Care debate (as many education arguments
are), educational outcomes can be derived from numerous
sources, of which schooling is only one.
 In order to achieve this primary goal, subsidiary ones have to be
met:
 EFFICIENCY: Both Allocative (Providing the right mix of education)
and Productive (running schools and institutions as efficiently as
possible).
 EQUITY: See the start of essay. Difficult to pin down, but can be
determined by equality of opportunity – that if two children with similar
preferences desire education, they should be able to attain the same
minimum standard irrespective of income.
 Should be noted these slides will largely focus on primary +
secondary education.
COSTS + BENEFITS
 There are difficulties when evaluating the costs and benefits of
Health Care, however, it must be noted that all costs and benefits
must be DISCOUNTED.
 This is, in particular, true for the benefits as they will accrue over time,
whilst the majority of the costs will occur instantaneously.
 Problems of measurement in Education:
 Output cannot be measured:
 Test Scores are only a very narrow measure of the benefits – benefits of a good
education include CONSUMPTION BENEFITS, EXTERNAL BENEFITS, which
cannot be reliably measured.
 Ambiguity in the Production Function:
 First of all, output is usually restricted to being defined as test scores. Secondly,
one can’t reliably measure the quality of inputs (children, teachers, capital).
 Causality:
 Even if we could overcome those measurement difficulties, there is the problem of
establishing a link between inputs and outputs. This problem of causality is taken
on by two main theories: Human Capital and Screening.
THE HUMAN CAPITAL MODEL
 Two main assumptions for the simplest model:
 Education CAUSES rises in an individual’s MPL, and therefore his future money income.
 Productivity increases are the ONLY gains from education – we ignore external benefits and
consumption benefits (this is for measurement purposes).
 The Human Capital Model states that an individual will invest in education today due to a higher
stream of income in the future.
 Empirically, it is true that the discounted stream of future income far exceeds the initial cost of
education
 This also suggests the desirability of Government intervention in Education – if extended education adds
to the productive capacity of the economy as a whole, then there is also a SOCIAL rate of return that
increases benefits above and beyond the PRIVATE rate of return.
 This can be shown in a standard externality diagram with MSB > MPB
 Indeed, Becker (1964) showed that private firms would not provide general training to workers as
other firms would compete those employees away.
 The firm benefits (mostly, as wage does not rise by as much as MPL) from specific training, therefore it
must bare the cost.
 The individual benefits (mostly) from general training as s/he will be able to get a generally higher wage,
and therefore s/he must bare the training costs.
 Relaxing the second assumption does not substantially change the results.
 In addition, it should be noted that it may be the case that as the stock of human capital (knowledge)
increases, the greater the rate of depreciation and the greater the need to undergo training to maintain the
stock.
 This may act against the positive effect on wages in later years, near retirement.
THE SCREENING HYPOTHESIS
 The screening hypothesis is a direct retaliation to the first assumption of the Human Capital Model of
education.
 It states that while higher income is associated with higher levels of education, it does not CAUSE it.
 Two branches: Screening Hypothesis (general, with many tasks) and Signalling (specific, only one task)
 The Signalling model is essentially self-selection; a firm will pay different amounts to workers performing
the same task depending on their education level. Those with innate ability will therefore choose to undergo
education as they face a lower cost. OUTPUT IS UNCHANGED.
 The screening hypothesis is where there are numerous posts and the firm uses educational attainment as a
proxy for productivity. OUTPUT (likely) RISES.
 It states that employers essentially pass on the costs of selection to universities and secondary schools,
and it is in the priorities of the individual to attend these institutions
 This argument is linked to that of Akerlof’s ‘lemons’ model – a firm can’t distinguish between a high
skilled worker and a low skilled worker without incurring large costs.
 Therefore it passes on those costs to schools to achieve a separating equilibrium, where the high skilled
workers send signals through high test scores and prolonged progress in the educational system.
 The implication of this is that there are NO (in the case of the signalling hypothesis) or LOWER
(screening; helps employers more efficiently identify skilled labour) social benefits associated with
longer education for an individual than the human capital model suggests.
 It also implies that education may not cause a rise in productivity.
 Stiglitz is an advocate of this  He suggested that education performed a similar function to dress as a
screening device.
 However, empirical evidence is inconclusive.
EXTERNALITIES, RATE OF RETURN,
ECONOMIC GROWTH
 Externalities:
 Externalities, as already stated, come in three main forms from education:
 Raising the productive capacity of the economy.
 Increasing tax revenues due to high earners.
 Civic benefits – school infrastructure encourages community gatherings + empowerment of individuals.
 In addition, other’s education may factor in the utility of an individual  If I receive education but no one
else does, then I cannot fully utilise that education to improve my communication with others.
 However, as always, empirical data are hard to come by, making the precise extent of these externalities
hard to judge.
 The screening hypothesis also implies a much lower level of these externalities (in particular the first
two), suggesting OVER CONSUMPTION of Education, rather than UNDER CONSUMPTION.
 Rate of Return:
 Rate of Return studies use only monetary valuations to determine the rate of return that reduces the net
present value of education to zero.
 Two main conclusions from the studies:
 Primary education provides the HIGHEST rate of return to society, with diminishing returns after that.
 Private benefits ALWAYS exceed social benefits (in monetary terms)
 Economic Growth:
 It is clear that no country can develop economically without it’s population having at least a basic
level of numeracy and literacy.
 However, the precise effect of education is difficult to determine – it affects the quality of the labour
force, but is not the only variable to do so.
 Also, the infrastructure is important – high spending is not a sufficient condition for quality education;
see the USSR.
INTERVENTION ON EFFICIENCY
GROUNDS
 How far does education comply with the Standard Assumptions?
 Perfect Information:
 Quality of the Product  Difficult to define what the ‘product’ actually is, education is a
consumption good with high sunk costs. In addition, primary + secondary education decisions are
made by a third party (the parent), which might not accurately reflect consumer’s preferences.
 In addition, there may well be unequal power, leading to under consumption by SEG.
 Prices  Irrelevant due to not meeting first condition.
 The Future  Not a problem in education – parents know their children will need a minimum
length of education.
 Perfect Competition:
 No reasons why schools could not behave in a perfectly competitive manner (as if to profit
maximise). Would they?
 See QM slides; cream skimming would likely occur, and in a local monopoly position, the school
may well under provide.
 In addition, benefits of perfect competition are contingent on perfect information – education
doesn’t meet this, so benefits will be muted.
 Market Failures:
 There are no problems regarding increasing returns to scale or public goods – however, there are
significant externalities.
 Solutions for these problems are generally regulation based (the market may provide
the solution itself in some cases). However, the extent of information problems will
determine whether the state should provide or not.
INTERVENTION ON EQUITY GROUNDS
 Horizontal Equity:
 Concerned with perfect information and equal power.
 Therefore suggests imposition of minimum standards or, where
severe, public allocation/provision depending on relative efficiencies
of the sectors.
 This improves both efficiency and equity.
 Vertical Equity:
 Concerned with how much redistribution via education there should
be between rich and poor.
 Efficiency arguments of this type are given by the ‘warm glow’
model – it is hard wired into the rich’s preference functions that a
minimum standard of education will be utility education.
 This suggests in-kind transfers are optimal.
 However, the extent of the redistribution of in kind transfers is a
question up to the different theories of social justice.
TYPES OF INTERVENTION
 Pure Private Market:
 Not feasible, for all the reasons listed (externalities, imperfect information, unequal
power, imperfect competition.
 Suggests SOME public sector involvement.
 Mixed Public/Private:
 Essentially talking about voucher systems.
 Concept is that parents can exercise choice over where they send their child and
provision is wholly private, but state wholly or partially subsidises the child and
uses regulation to prevent inefficiencies.
 However, private consumption depends on perfect information, which is unlikely to
be the case. In addition, competition is fundamentally skewed because of the high
sunk costs in switching schools. Also, likely to miss the externality of social
cohesion.
 Likely to be highly inequitable - a voucher to a higher income SEG will simply give
them more power over lower SEG; a top up voucher system will simply accentuate the
differences between the two groups.
 Important to note, however, that there are different types of voucher systems.
 Pure Public Provision, Allocation + Finance:
 The allocation argument is based on the assumption that, on average, the state can
make better decisions about a child’s education than the parent.
 The provision argument is based on the assumption that the state can provide more
efficiently than the market – this is questionable, as efficiency problems are less
pervasive than those for health care
 Interesting to note that there is less variation in education schemes in the developed World than
in Health Care
ASSESSMENT OF UK EDUCATION
SYSTEM
 Efficiency:
 Signs that the system is allocatively efficient to an extent is shown by the
changed enrolment patterns post – ERA 1989.
 However, the LEA still retains sway in allocation of pupils
 Additionally, information available to parents has improved in the form of
league tables, but the information may not be in a necessarily appropriate format
(should be standardised)
 Primary and Secondary education is wholly subsidised and publicly provided;
this means that externalities are fully captured.
 However, proponents of the screening hypothesis will argue that this has lead to an
inefficiently large consumption of education
 It is not possible to judge whether we are spending enough in total on
education due to somewhat insurmountable measurement problems (at least, this
is Barr’s assertion).
 However, spending should increase to keep pace with technological change.
 The education reforms of the last 2 decades have lead to significantly improved
school productivity (measured in terms of exam results), according to
Glennerster.
 However, Feinstein indicates that early child development is a substantial
motivator of educational attainment – The Government should intervene much
earlier than 5.
 In addition, broader targets than test scores should be focused on.
ASSESSMENT OF UK EDUCATION
SYSTEM
 Equity:
 Use the definition of equality of opportunity.
 The role of Income:
 Education is not yet totally free of income – implicit costs such as uniforms, field trips etc. Still
exist.
 School education after 16 has a higher opportunity cost for working class families.
 Inequality of Achievement:
 Inequality of test scores by SEG has drastically declined, studies by Glennerster has shown.
 However, middle and upper class parents can still hold higher power by being able to move to areas
inside good schools’ Area Of Prime Responsibility / send their children to private schools.
 Arguable that the Government hasn’t done enough to reduce incentives for cream skimming by
schools.
 To a degree, these inequalities in access could be the result of differential preferences rather
inequality of opportunity.
 Additionally, if the screening hypothesis is to be believed then these inequalities are of limited (at
most) significance for the wider picture.
 Redistributive effects of school education:
 It is likely that education is financed progressively – a rich person, on average, spends 50% more on
education than a person in a lower SEG, according to Le Grand.
 It is highly likely, therefore, that School education is an equalizing force between SEG.