The economics of education is a wide-ranging and growing sub-field of economics. It encompasses topics such as research on returns to education in the labour market, efficiency of the education “industry”, effects of education on the growth of economies, and educational finance. It also encompasses all levels of education, ranging from pre-school learning over school and university education and training to lifelong learning.The following list provides an encompassing overview of the various sub-fields of research in the economics of education and of the most important topics within each sub-field. To illustrate the kind of work performed under each of these headings, we present below a brief overview of some research undertaken by members of the EENEE network as examples of research in each category.
1 Micro: Labour Markets 1a Rates of return to education, costs and benefits 1b Externalities and non-market effects of education 1c Employment and demand for skills, skill-biased technological change 2 Micro: Schooling Quality and Educational Production 2a Families and student achievement, intergenerational mobility 2b Resource, teacher and class-size effects, efficiency 2c System effects (choice, competition, testing, autonomy, etc.), interventions 2d Teacher labour markets 3 Macro: Human Capital 3a Human capital and economic growth, productivity 3b Education and social cohesion, distribution, inequality 4 Educational Finance 4a Public financing 4b Private financing (incl. tuition fees) 5 Levels of Education 5a Pre-school education 5b Primary school 5c Secondary school 5d Vocational education 5e Tertiary (university) education 6 Training, Informal Learning and Lifelong Learning 6a Training (firm-specific and general knowledge) 6b Informal learning 6c Adult education and lifelong learning 7 Research and Knowledge Creation 7a Research and development (R&D) 7b Entrepreneurship and innovation 8 Socio-Demographic Aspects 8a Gender 8b Aging 8c Minorities and migration 8d Handicapped 9 Economic Theories of Education 9a Political economy and public economics of education 9b Positive and normative theories of education 10 Comparative Economics of Education 10a Returns to education 10b Institutions of the education system 10c Effectiveness 10d (In)equality 10e Finance
A first central topic in the microeconomics of education is the effect of education on wages and employment on the labour market. Microeconometric estimations of rates of return to investments in education reveal how much of an effect each additional year of education has on individual wages, bringing together the costs of education with the future benefits on the labour markets, which is the core concept of human capital theory. Virtually all EENEE network members have contributed to this literature, most of all including Psacharopoulos’ numerous and much-cited studies in the area (e.g., Psacharopoulos 1994; Psacharopoulos and Patrinos 2003). Psacharopoulos also made a leading early contribution to the literature showing that estimated returns to education indeed reflect a productivity-enhancing effect of education and not just its screening effect as a signal of pre-existing ability (Layard and Psacharopoulos 1974). Further leading contributions include Oosterbeek’s survey, specifically including European evidence (Harmon, Oosterbeek and Walker 2003; cf. also his work on the Netherlands, Oosterbeek 1990), the estimates for specific European countries by Brunello, Hartog and Wolter in Harmon et al. (2001), the estimates for acceding countries by Münich, Svejnar and Terrell (1999) and by Jurajda, Filer and Plánovský (2000), and many other studies by members of the EENEE network, including several with a comparative perspective. Recent empirical work tries to estimate whether there are additional external returns to investments in education that are not accrued by the individual but rather by society at large, in addition to the individual wage effect (Ciccone and Peri 2002).Education does not only affect wages, but also the chances of finding employment, as can be seen in the pattern of long-term unemployment in Europe (Machin and Manning 1999). Empirical evaluations can reveal the success of different active labour market policies that try to counter this employment effect by specific education programmes for low-skilled youth and by on-the-job training (e.g., Fougère, Kramarz and Magnac 2000 for youth employment in France). Recent technological changes seem to have been particularly skill-biased, increasing the demand for educated manpower relative to low-skilled workers (Machin and van Reenen 1998; Berman, Bound and Machin 1998). Furthermore, there seems to be the danger of a serious brain drain from Europe with many of the best-educated people leaving to find jobs elsewhere (cf. Becker, Ichino and Peri 2003 for Italy).
A second major area of the microeconomics of education is the determination of student achievement in the education process. Microeconometric studies can estimate the effect that family backgrounds, resource endowments and institutional features have on the performance of students in key curricular areas, thus showing how a high quality of schooling may be achieved in the “production” of education in the education “industry,” i.e. in schools and other educational institutions. General studies on the relative effects of families, resources and institutions on student performance exist both for EU countries (Wößmann 2003c) and for acceding countries (Ammermüller, Heijke and Wößmann 2003). Schleicher is the responsible co-ordinator both of the well-known PISA student-achievement study (OECD 2001) and of the regular OECD statistical collection Education at a Glance which reports on performance, resources and institutional features for European and other OECD countries (OECD 2002). Several studies have analysed the effect of family backgrounds on student performance, including Norwegian evidence on the effect of student body composition on school performance and on determinants of parental effort in education production (Bonesrønning 1996; 2003), the relative importance of nature and nurture in the interrelation between family background and schooling (Plug and Vijverberg 2003) and families’ trade-off between child quantity and quality (Hanushek 1992). Education also plays a leading role in the extent of intergenerational mobility in a society (cf. Dearden, Machin and Reed 1997 for Britain).A key question in the literature on educational production is what role resource endowments can play in enhancing the quality of educational outcomes. Hanushek’s (1986; 2003a) path-breaking and much-cited survey with several updates on this matter has shown that resources in general and class sizes in particular play a very limited role in determining students’ educational performance, revealing the lack of efficiency in public schools and thus a failure of input-based schooling policies. Similar results of the futility of resource policies have also been found for many European countries. For example, substantial increases in real resource endowments per student did not lead to improvements in average student performance in most OECD countries (Gundlach, Wößmann and Gmelin 2001), i.e. schooling productivity as defined by outputs per inputs has declined severely. Vignoles et al. (2000) survey the evidence on resource effects in the United Kingdom, and Wößmann and West (2002) present international evidence on class-size effects, including several European countries, also finding that additional resources do not seem to be efficiently used in Europe.Recent evidence reveals that institutional features of the education systems, such as centralization of examination, school autonomy, teacher influence and competition, are much stronger related to the cross-country variation in student performance than resources (Wößmann 2003a). Studies have only recently begun to evaluate in earnest the effectiveness of educational policy interventions. One area of such interventions is the field of educational accountability, where policymakers try to hold teachers and schools accountable for what they achieve (cf. Hanushek and Raymond 2001). Another area that received a lot of recent attention is the opportunity of educational vouchers to improve the quality of schooling by giving students and their parents choice and thus introducing competition between schools. Howell and Peterson (2002) and Peterson et al. (2003) analyse key recent randomized experiments on school vouchers, which seem to help in lowering the black-white achievement gap in urban schools in the United States. Filer and Münich (2000) analyse the Czech and Hungarian experience on responses of private and public schools to voucher funding. The relationship between public and private schools and their relative effectiveness also falls in this area (cf. e.g., Jimenez and Sawada 2003).Finally, the functioning of the teacher labour market affects the quality of schooling in a central way, as well. Dolton (cf. 2004) has analysed the economics of teacher supply extensively, with special attention to the impact of female labour-force participation and choice of occupation (Dolton and Makepeace 1993) and leaving decisions and teacher turnover (Dolton and van der Klaauw 1995; 1999). Further studies on teacher labour markets include Wolter and Denzler’s (2003) analysis of the wage elasticity of teacher supply in Switzerland and the study by Falch, Bonesrønning and Strøm (2003) on teacher sorting, teacher quality and student composition.
A third key topic in the economics of education is the impact of human capital on economies at large. Such macroeconomic studies deal with the impact of education both on the economic growth and development of countries and on the cohesion and inequality within societies. Educational human capital has been found to have strong and consistent positive effects on economic growth and productivity of a country, which becomes particularly clear once problems with measurement errors in the underlying data on average years of education in the working-age population are dealt with (cf. Krueger and Lindahl 2001; de la Fuente and Doménech 2001; de la Fuente and Ciccone 2002). De la Fuente (2002) also found that equalization of education levels accounted for a substantial part of the reduction of regional disparities among Spanish regions. Furthermore, the quality of education, as measured by cognitive achievement tests, seems to have an even bigger impact on the fates of nations than mere educational quantity, both in terms of economic growth of countries over time (Hanushek and Kimko 2000) and of levels of economic development achieved by the countries (Wößmann 2003b).Several studies also analyse the impact of education on the degree of social cohesion in a country. Marin and Psacharopoulos (1976) analyse the impact of schooling on income distribution, and Hanushek (2001) evaluates the success of policy interventions to lower black-white achievement differences in the United States. Wößmann (2003c) estimates the extent to which different European school systems achieved equal educational opportunities for children from different social backgrounds. Redmond and Kattuman (2001) show that human capital characteristics were the major drivers of inequality growth in Hungary in the 1990s, and von Weizsäcker (1996) analyses the impact of educational choices on lifetime earnings inequality and related conflicts of public policy. Psacharopoulos and Hinchliffe (1972) estimate the elasticity of substitution between workers with different amounts of education, which has implications both for the estimation of growth effects of education and for the distributional impact of changes in the educational composition of the work force.
Investments in education cost money, and a fourth strand of the economics of education deals with topics of the financing of educational investments. There is a host of policy options in educational finance, ranging in a continuum between state and market financing (cf., e.g., Jimenez, Psacharopoulos and Tan 1986; Oosterbeek 1998; Wolter 2001). These alternatives raise questions of equity and efficiency of the public subsidisation of education (Jimenez 1986). Furthermore, with public financing the degree of educational spending often depends on local public choices (Falch and Rattsø 1999). Educational vouchers can introduce demand-side financing mechanisms in education (Patrinos 2000). The uncertainty of educational decisions introduces additional aspects to the relative merits of public versus private financing of education (Wigger and von Weizsäcker 2001).
While the previous analyses were mainly concerned with education in general and with compulsory levels of education in particular, much attention has also been placed at specific non-compulsory education levels. Psacharopoulos has contributed many studies to the topic of vocational education, including the editing of a whole special issue on the topic (Psacharopoulos 1988). Dearden, McIntosh, Myck and Vignoles (2000) estimate returns to vocational qualifications in Britain. In terms of tertiary education at the university level, Hartog and Oosterbeek (1998) study the reasons why one may pursue a higher education, Becker (2001) studies why many Italians fail to finish university, and Dolton, Greenaway and Vignoles (1997) present a future economic perspective of higher education in Britain. Wolter and Weber (1998) deal with the financing of universities, and Leuven, Oosterbeek and van der Klaauw (2003) perform a randomized experiment on the effect of financial rewards on the achievement of economics students at the University of Amsterdam.Much less is known about economic aspects of pre-school education in Europe. While the economics of early childhood education and day care is of utmost importance to future educational achievements (Psacharopoulos 1982) and much work has recently been done on this topic in the United States, work on the economics of pre-school education in Europe constitutes an important field for future research.
Once people enter the work-force, they do not seize to learn. Particularly in a world of rapid structural changes in the economies, both training and lifelong learning constitute a vital part of human capital policies. The economics of education generally distinguishes between firm-specific and general-knowledge training and asks for the different incentives to invest in the two, both for the worker and for the employer. Leuven and Oosterbeek (2001; 2003) have contributed to this literature by analysing firm-specific human capital as a shared investment and by estimating the effect of tax deductions on training. Brunello and Medio (2001) present an explanation for international differences in workplace training. As a major empirical advancement to economics knowledge in general, Abowd, Kramarz and Margolis (1999) and Abowd and Kramarz (1999) use matched longitudinal employer-employee data to analyse specific remuneration patterns within firms, finding that additional personal features, not related to formal education, affect wage variations in France substantially.Jenkins, Vignoles, Wolf and Galindo-Rueda (2002) analyse the determinants and effects of lifelong learning. Leuven and Tuijnman (1996) treat the financing of lifelong learning, and Oosterbeek (1998) suggests additional innovative ways to finance lifelong learning. Patrinos (2003) gives a detailed account of the challenges that lifelong learning plays for developing countries in the global knowledge economy.
All these forms of education are crucial for a society’s capability to advance and disseminate research and knowledge and to apply it in the economy through entrepreneurship and innovation. Thereby, education becomes pivotal in developing a knowledge-based economy. Because knowledge needs to be shared, agglomeration effects become important, where densities of employment have an impact on average labour productivity, as has been estimated both for the United States (Ciccone and Hall 1996) and for Europe (Ciccone 2002). To transform research knowledge into marketable goods, an economy needs innovative entrepreneurial capabilities, which have been shown to be negatively related to risk aversion (Cramer, Hartog, Jonker and van Praag 2002). Technological innovations, in turn, affect economic performance, employment and wages (cf. Hall and Kramarz 1998).
In many societies, there are considerable gender differences in educational opportunities and outcomes. Thus, basically all of the studies on rates of return to education cited above distinguish between labour-market returns for female and male workers. Also, basically all of the studies on the determinants of educational achievement study performance differences between girls and boys. Examples of specific gender studies are Dolton and Makepeace’s (1987; 1993) studies of the impact of marital status and child rearing on earnings differentials in the graduate labour market and of the impact of female decisions about labour-market participation and occupational choice on the supply of teachers; Filer’s (1993) study showing the importance of properly accounting for work experience when estimating the rate of return to education for women; and Machin and Puhani’s (2003) study of the impact of subject of degree on gender wage differentials in the United Kingdom and Germany.
While human capital theory sets the major framework for economic theories of education, there are also advances on several other theoretical fronts. The forthcoming book by Gradstein, Justman and Meier (2003) sets forth an encompassing framework for the political economy of education and raises many issues relevant to the theory of public economics of education. Falch and Rattsø (1997) study political economic determinants of school spending in federal states, and Nerlove, Razin, Sadka and von Weizsäcker (1993) derive the theoretical impact of tax policy on the accumulation of human capital.As examples of positive and normative theories of education more generally, Hartog (2001) presents a theoretical framework for understanding empirical results on human capital and individual capabilities, and Bishop and Wößmann (2004) depict effects of institutional features of education systems on educational outcomes in a simple model of educational production. Brunello and Ishikawa (1999) model the effects of the size of the elite school sector on investment in academic skills, average productivity and wages. Wigger and von Weizsäcker (2001) present an economic model showing the implications of uncertainty and risk of educational decisions for public versus private forms of financing of higher education.
Finally, studies of the comparative economics of education use international variations in educational features to better understand the economics of education. For example, Wößmann (2003a) uses international evidence to show the crucial importance of educational institutions for the cross-country variation in student performance, and Wößmann (2003c) looks at the cross-country pattern of within-country determinants of student performance, including the relative size of family-background effects. Leuven, Oosterbeek and van Ophem (2003) use international differences in the demand and supply of skill to explain international differences in wage differentials by skill groups. De la Fuente (2003) calculates and compares rates of return to education across European countries, and Psacharopoulos (1994) and Psacharopoulos and Patrinos (2003) present comparative evidence on returns to investment in education from additional countries. Brunello and Comi (2003) present evidence from eleven European countries on the impact of education on earnings growth, and Brunello and Medio (2001) explain international differences in workplace training. Wolter (2000) compares wage expectations of Swiss and US students with regard to certain educational decisions.
Author: Ludger Wößmann
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