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Social Policy III Education


... does not account for non-monetary (non-pecuniary) externalities. ... Non-pecuniary benefits important as well (artists, priests, specialised scientists) ... – PowerPoint PPT presentation

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Title: Social Policy III Education

Social Policy IIIEducation
  • Dariusz Stanko, Ph.D.
  • Department of Social Insurance

Education and its definition(s)
  • upbringing, teaching, science, process of
    acquiring knowledge, skills, learning.
  • according to Wikipedia a notion related to
    intellectual development and knowledge of a man,
    applied in the following contexts
  • process of acquiring knowledge at school or
    outside, Ministerstwo Edukacji Narodowej i
    Ministerstwo Nauki i Szkolnictwa Wyzszego.
  • notion used for describing the level of knowledge
    of a particular person, society, nation. E. can
    be good, bad, (in) sufficient.
  • upbringing (mainly intellectual)
  • teaching, all processes aimed at passing on the
    knowledge, shaping character and particular
  • according to social policy activity (mainly) of
    the state, which aims to equalize educational
    chances of people at various stages of their

Education as a human right
  • The right to education has been described as a
    fundamental human right since 1952, Article 2 of
    the first Protocol to the European Convention on
    Human Rights obliges all signatory parties to
    guarantee the right to education. At world level,
    the United Nations' International Covenant on
    Economic, Social and Cultural Rights of 1966
    guarantees this right under its Article 13.

Market for education - is it perfect?
  • Standard market assumptions
  • perfect information (prices, future)
  • prefect competition (individuals price takers,
    equal power)
  • Market failures
  • public goods
  • external effects
  • increasing returns to scale

Source Barr (1998) chapter 4.
State intervention
  • regulation (quality of S, regulation of
    individual D)
  • finance (subsidies, taxes, partial, total)
  • public production (national defence, education
  • indirect interference in the market mechanism
  • income transfers

Source Barr (1998) chapter 4.
Education public good? (1)
  • Rules
  • no competition
  • free access
  • no equivalency
  • Zero margin costs. Usually mass consumption.
  • A good that is non-rivalled and non-excludable.
    This means, respectively, that consumption of the
    good by one individual does not reduce
    availability of the good for consumption by
    others and that no one can be effectively
    excluded from using the good.(Source

Education public good? (2)
  • Classical public goods
  • national defence, domestic security, money
  • Pure public goods
  • publicly financed
  • Social goods (no classical) financed publicly or
    privately (private goods)
  • Externalities

Allocation of education (1)
  • 1. Are particular social services public good?
  • Universities teach, develop and preserve the
    culture, give skills indispensable for creative
    activity, form good citizens, etc.
  • Socrates studying an aim itself. Is it a public
  • 2. Defining something as an economic good
    influences whether SP deals with it or not. SP
    allocation of goods according to the following
  • efficiency,
  • goodness,
  • justice,
  • and/or other rules (equity).

Allocation of education (2)
  • 3. Problems with quantification of basic
    elements determining SP.
  • What to produce, how much, importance of each
    educational products.
  • 4. How to define the relationship between
    benefits/production and costs.
  • normative economics costs issue
  • positive economics benefits/effects issue
  • There is a danger of focusing too much on the
    measurable aspects at the cost of immeasurable
    (cost of education vs. social values).

Allocation of education (3)
  • Costs or values?
  • Costs important even in cases motivated on purely
    moral grounds
  • Conflicting choice of ideas
  • Conflict between moral imperatives (freedom,
    minimal quality of life, privacy) and need for
    the choice.
  • Cost-benefit analysis
  • Not particularly good at aggregate level (social
    preferences). Quite good at lower levels
  • Social services
  • Similarities need for allocation, need for
    institutions, production is decided not by the
    individuals but by arbitral methods of
    cost-benefit analysis.
  • Differences nature of the services, different

Human capital (1)
  • At the beginning associated with labour,
    homogeneous, easily replaceable
  • Knowledge differs from other production factors
    because it is
  • expansive and self-generating (intelligence,
  • transferable and divisible

Human capital (2). Chicago school
Becker, G. (1964). Human Capital. Columbia
University Press New York. Blaug, M. (1972). An
Introduction to the Economics of Education,
Penguin Harmondsworth.
  • similar to other physical factors of production
  • can be invested in (education, training,
  • factor of income for a particular person
    (asset interest rate)
  • substitutional but not in 100
  • specific capital vs general capital (useful
    for a particular employer or for everyone)

Human capital (3). Modern economics
  • Critique of the Chicago school
  • income differences not everything can be
    explained by differences in human capital
  • too general (character, connections, prestige,
  • value of SGH trademark?
  • Japanese Tokyo experiment (1969, Kim and Okita
    2004, Ma and Kawaguchi, 2006)
  • theory of human capital development
  • social capital (social contacts, trust)
  • instructional capital (knowledge to share with
  • individual capital (leadership, creativeness,

Education production function (1)
  • Problem with setting the production(what, how
    much and how to produce)
  • Complex input variables (facilities at school,
    number and quality of teachers, materials, books,
    studying time, environment etc.)
  • Relationship between level of education and
    economic growth Denison (1962, 1967)

Education production function (2)
  • Cobb-Douglas function (income constant with
    regard to inputs)

Q aNaKß (aß1) N amount of personhour work
(labour) K amount of machinehour work (capital)
  • a, ß production elasticises with regard to
    changes in N and K

Education production function (3)
a, ß measure relative share of N and K in
production, under the assumption that these
factors receive their remuneration equal to their
marginal production. Marginal products of N and
Total amount of production Q received by N s.t.
paying personhour salary equal to their marginal
productivity equals to
Education production function (4)
and the amount of production that goes to owners
of the capital K is equal
Since1 , and QßQQ and labour and capital
shares receive full production.
Education production function (5)
  • Taking logarithm of Cobb-Douglas function, one
    receives the rate of growth of national capital
    (dots over variables represent the pace of
    change, i.e. logarithms)

where a, ß are shares of labour and capital in
the income
Education production function (6)
  • It is possible to measure the growth rate of
    changes in Q, N i K, while a with dot represents
    residual value which is neither explained by
    changes in labour nor capital. It is more or less
    2/3 of the share in production.
  • Table 9.1/236 Contributions to growth of GDP...
  • Denison residual value due to higher education.
    Great importance of improvements in education
    (alphas elasticity)

Education vs income (1)
  • Denison believed that great part of residual
    value was related to higher education of labour.
  • Improvement of education has strong impact on
    incomes since the elasticity of production with
    regard to labour (alpha) is much higher than the
    corresponding elasticity of capital (beta).
  • ...however, there are also some other factors ?

Education vs income (2)
  • Other factors that generate the income
  • genetic abilities
  • parents socio-economic status
  • parents income
  • race
  • sex
  • degree of unionization
  • experience
  • motivation
  • risk aversion
  • ...luck

Education vs income (3)
  • Wolfle and Smith (1956) 2/3 of income
    differences of university and upper secondary
    school graduates can be statistically attributed
    to additional education, when differences in
    fathers profession, secondary school ranking and
    IQ are controlled (Denison, 1964). Similarly -
    Becker (Human Capital, 1964, page 87).

Salary differences due to
Denison Bowles (1973) Jenks
(1972) P/L - upper ranking
6 - IQ 3 4 - fahters profession
7 - socio-economic status 57 -
education much 39 20 46
P/L Psacharopoulos and Layard (1979, str. 495)
Education vs income (4)
  • Screening hypothesis screening device for
    selecting skilled ones
  • Arrow, K.J. (1973) Higher education as a
    filter, Journal of
  • Public Economics 2 193-216
  • Difficult to verify what about so-called
  • Thus education indeed increases productivity

Education as an investment (1)
  • Education increases salaries/income
  • Model assumptions
  • 1) a person maximise its lifetime earnings)
  • ? non-monetary benefits, so estimated rate of
    return will be lower than the actual one
  • ? number of labour hours is set up exogenously
    (there are some other things to do in life apart
    from working to maximise lifetime earnings)
  • 2) there is no education having completed a
    school, so constant salary.
  • 3) everyone has equal access to capital markets
    and identical basic skills
  • 4) no work while studying, no study during
    working career.

Education as an investment (2)
  • Example average rate of return from additional
    three years of study (undergraduate) for a person
    that will work for next 47 years

C- direct costs of education, per year Ef
foregone salary due to education, per year Es
higher salary due to education, per year r
discount rate
First part of the equation PV (increase of
salary), Second part of the equation PV (cost
of education)
Education as an investment (3)
  • Private rate of return
  • Costs and benefits of an individual, i.e. Es and
    Ef represents salaries net of income tax, C
    cost of education with donations and subsidies.
    This rate describes incentives for the individual
    to study and takes into account financing of

Social rate of return Takes into account taxes
and subsidies but usually does not account for
non-monetary (non-pecuniary) externalities. This
rate is important for social choices.
Average rates of return vs. marginal rates of
Education as an investment (4)
  • Table 9.2/ 240 Social Rates of Return...
  • Usually there are lower than private rates of
    return because the additional income tax of
    higher earners is lower than subsidy given for
    their education and because they do not account
    for externalities.

Table 9.3/240 - Social and Private Rates of
Return ...Education is not a homogeneous
process, so difficult to calculate its
profitability with regard to length of schooling,
c.f. table 9.3/ 240..
Developed countriesrate of return from education
gt rate of return from capital Developing
countries both rates higher than in developed
Private rates of return from upper secondary and
tertiary educations (OECD 2007)
Education and externalities
  • Non-pecuniary benefits important as well
    (artists, priests, specialised scientists)

Difficult to assess size of such externalities
How much coercion in education?
  • Common belief that there should be some level of
    obligatory participation regarding primary
    education and free access to higher levels of
    education (Rawls-like way of thinking).
  • Common agreement
  • basic education imposed on all children
  • consumption of such compulsory education should
    be for free
  • such education should contain elements of
    development at least at minimal level
  • each education is somehow subsidized but
    externalities only are not enough argument for
    involvement of the State in its production

Financing education
  • scholarships
  • education vouchers
  • student loans

Education services - lowering the market price
(sometimes to zero) by subventions or -
increasing purchasing power of consumers by
granting scholarships, vouchers or loans.
Challenges for equity in education
  • fairness making sure that personal and social
    circumstances are not obstacle to achieving
    educational potential
  • inclusion ensuring a basic minimum standard of
  • Three key policy areas
  • the design of education systems
  • practices in and out of school
  • way resources are allocated

Source OECD (2008), Ten Steps to Equity in
How social background affect performance in
mathematics (2003)Relative chances of students
in lowest and highest socio-economic group ending
up with very poor (below or at Level 1)
performance in mathematics
How many students struggle with
readingPercentage of students below and at Level
1 of proficiency in the OECD PISA reading scale2
Equity in education OECD recommendations
  • Design
  • 1. Limit early tracking and streaming and
    postpone academic selection.
  • 2. Manage school choice so as to contain the
    risks to equity.
  • 3. In upper secondary education, provide
    attractive alternatives, remove dead ends and
    prevent dropout.
  • 4. Offer second chances to gain from education.
  • Practices
  • 5. Identify and provide systematic help to those
    who fall behind at school and reduce year
  • 6. Strengthen the links between school and home
    to help disadvantaged parents help their children
    to learn.
  • 7. Respond to diversity and provide for the
    successful inclusion of migrants and minorities
    within mainstream education.
  • Resourcing
  • 8. Provide strong education for all, giving
    priority to early childhood provision and basic
  • 9. Direct resources to the students with the
    greatest needs.
  • 10. Set concrete targets for more equity,
    particularly related to low school attainment and

Source OECD (2008), Ten Steps to Equity in