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The Social Value of Education


... is one of the most widely studied empirical magnitudes in economics ... Home productivity. Consumption decisions. Production of children's human capital ... – PowerPoint PPT presentation

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Title: The Social Value of Education

The Social Value of Education
  • Robert Topel
  • University of Chicago

  • Economists (and others) have generally had
    little success in estimating the social effects
    of different investments, and, unfortunately,
    education is no exception.
  • Becker, Human Capital (1975)

Social vs. Private Returns
  • The private, monetary return to education is one
    of the most widely studied empirical magnitudes
    in economics
  • Consensus returns are substantial
  • Appx. 8-15 per year of schooling
  • 4 years of college raises earnings by about 65,
    or a return of over 13/year
  • Why is public funding virtually universal?

  • When education of one individual confers external
    benefits (costs) on others, there is a positive
    economic case for encouraging (discouraging)
  • Private return to schooling may understate the
    full social benefit of education

A Taxonomy
  • Private Social
  • Education benefits only the individual
  • No compelling case for public participation
  • Private lt Social
  • Individuals education benefits others
  • Public expenditure can enhance efficiency
  • Private gt Social
  • Education merely redistributes from poor to rich

Elements of Private Returns
  • Increased individual market productivity
  • Improved non-market productivity
  • Home productivity
  • Consumption decisions
  • Production of childrens human capital
  • Improved health longevity
  • Education as consumption
  • Enables consumption of HK goods (ideas)
  • Matching assortive mating

Elements of Social ReturnsPrivate lt Social
  • Social network externalities in production
  • Education raises the level of economic activity
    by more than its private return
  • Education economic growth
  • The level of education raises economic growth
    because educated people produce ideas
  • External benefits through social programs
  • Health
  • Other income transfers
  • Equity as a public good

Private lt Social(Cont)
  • Crime
  • Network externalities in consumption
  • Voting
  • Other 2nd best considerations
  • Distorted incentives to invest
  • Progressive taxes
  • Artificial compression of skill differentials

Elements of Social ReturnsPrivate gt Social
  • Signaling value of education
  • Education as a screening device
  • Private value as a signal, even if no impact on
  • No social gain

Measuring Private Returns A Primer
  • To calibrate social returns, we need a benchmark
    estimate of the size of private returns
  • Micro-data on wages, schooling, experience
  • Assume
  • only cost is foregone earnings
  • increase constant over lifetime
  • Rate of return is increase in earnings

Measuring Private Returns (cont)
  • lnWi Xiß Si? ei
  • Si is years of schooling for person i
  • ? is private monetary rate of return
  • Versions estimated world-wide
  • Returns 5-15
  • Comparable to returns on other risky assets
  • Sources of bias empirically unimportant

Difference in Log Average Wages College and High
School Graduates, 1963-2000
Changes in the Price of Skill
Rising Returns Implications for Social Policy
  • Rising returns gt increased scarcity of skills
  • Social policies that combat inequality may
    exacerbate the problem
  • Artificial compression of wage distribution
  • Tax policies
  • Income redistribution
  • Paradox Public expenditure as 2nd Best
    solution to encourage investment
  • Sweden
  • Australia

Sweden Reduced Returns Reduced Investment
Response of Investment
Educational Externalities
  • Private returns as a benchmark
  • E.g. if private (Mincerian) return to a year of
    schooling is 10, does the social return exceed
  • What are the sources of social returns?
  • How could we measure them?
  • Focus here productivity and income

Sources of Externalities
  • Higher level of productivity
  • E.g. Lucas (1988)productive ideas from social
  • Productivity of cities
  • Growth of education leads to growth in output
  • Growth effect exceeds private return
  • Higher growth of productivity
  • Education as producer of ideas
  • Level of education leads to growth of output

Growth Accounting and Social Returns
  • Output per worker in country j
  • With CRS

Schooling and Growth
  • Tractable model of schooling and growth
  • is the social return to
    schooling private plus external benefits
  • Is the impact of schooling on national output
    larger than its impact on individual?

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Alternative Approach States and Cities
  • Does greater average education in an area raise
    individual earnings, after controlling for
    individual education?
  • Is ? If yes, then taken as evidence of
    external benefits from education
  • Estimates are all over the map

Study Data Geogr. Unit Instrument ßE
Rauch (1993) Census 1980 SMSA OLS 2.8-5.1
Acemoglu and Angrist (2000) Census 1950-1990 State Compulsory Schooling Laws, Quarter of Birth 0.4
Moretti (various) NLSY 1979, Census 1980-1990 SMSA Age Structure, Land Grant College, Plant opening 20-25
Education and Growth of States
  • Relative growth of U.S. statespattern of
  • Two issues
  • Has growth in education contributed to economic
    growth of states? (Yes)
  • Has growth of education produced spillovers
    that raised total productivity by more than the
    private returns to schooling? (Maybe)

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IV (1950-2000, using 1940 values) -0.62 (0.08)
IV (1950-2000, using 1940 values) -0.83 (0.05)
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OLS 0.22 (0.03)
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Interpretation of the Evidence
  • Data suggest that education drives growth, and
    that social return substantially exceeds the
    private return
  • Yet growth in education may be correlated with
    other, unmeasured, factors that contribute to
  • Unobserved talent
  • Changes in demand for skills
  • Quality of education

Deeper Look at the Data
  • Isolate Total Factor Productivity as local effect
    on wages
  • Control for environmental factors affecting
    skills of workers using state of birth
  • Controls for differences in skills or quality by
    birth state and cohort

2-Stage Analysis
  • First Stage
  • (X Education and Experience Indicators)
  • Second Stage

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Education and Productivity Growth U.S. States 1940-2000 Education and Productivity Growth U.S. States 1940-2000 Education and Productivity Growth U.S. States 1940-2000 Education and Productivity Growth U.S. States 1940-2000 Education and Productivity Growth U.S. States 1940-2000 Education and Productivity Growth U.S. States 1940-2000 Education and Productivity Growth U.S. States 1940-2000 Education and Productivity Growth U.S. States 1940-2000 Education and Productivity Growth U.S. States 1940-2000
10 yr growth 10 yr growth 20 yr growth 20 yr growth 30 yr growth 30 yr growth 60 yr growth 60 yr growth
.046 (.017) .026 (.018) .068 (.019) .040 (.021) .067 (.017) .036 (.020) .081 (.021) .023 (.024)
1.23 (0.44) 1.08 (0.40) 1.01 (0.34) 1.35 (0.38)
R2 .894 .897 .952 .954 .978 .980 .248 .415
Includes Year FE. No overlapping periods. Figures
Social Returns to Schooling Where Do We Stand
  • Evidence for excess social returns is, at best,
  • Impact of education on TFP is greatly reduced
    when growth of other skills is accounted for
  • But evidence does indicate that social returns in
    economic growth are at least as large as private
  • Important contributor to convergence in incomes
    and welfare

Other Issues
  • Local investments in higher education
  • Empirical evidence on the signaling hypothesis