The Social Value of Education Robert Topel University of Chicago.
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Transcript of The Social Value of Education Robert Topel University of Chicago.
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?
Externalities
• When education of one individual confers external benefits (costs) on others, there is a positive economic case for encouraging (discouraging) education
• 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 < Social– Individual’s education benefits others– Public expenditure can enhance efficiency
• Private > 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 children’s human capital
• Improved health & longevity• Education as consumption
– Enables consumption of HK goods (ideas)– Matching & assortive mating
Elements of Social ReturnsPrivate < 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 < 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 > Social
• “Signaling” value of education– Education as a screening device– Private value as a signal, even if no impact on
productivity– 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 = Xiβ + Siρ + εi
– Si is years of schooling for person i
– ρ 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
Log-difference in mean wages, (college+)-(high school grads)
wagera
t
wageyear1963 1970 1980 1990 2000
.2
.3
.4
.5
.6
Changes in the Price of Skill
4 y
ea
r C
olle
ge
Pre
miu
m
Figure 2. College & Graduate Wage Premiums 1967-1997YEAR
Gra
du
ate
Pre
miu
m
70 75 80 85 90 95
1.40
1.50
1.60
1.70
1.80
1.90
1.55
1.65
1.75
1.85
1.95
2.05
2.15
Rising Returns: Implications for Social Policy
• Rising returns => 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 InvestmentF
ract
ion
with
So
me
Co
lleg
e
Fraction of 21-25 Year-olds with Some College 1963-1997YEAR
65 70 75 80 85 90 95
0.25
0.30
0.35
0.40
0.45
0.50
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 10%?
• 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 interactions– 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
ln ln lnjt j jt jty h A
ln Pjt jt jt jth X S u
ln Ejt jt jtA S a
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 it’s impact on individual?
P E
ln ( )P Ejt j jt jt jt jty X S u a
Table 1
The Effects of Education on Labor Productivity
Fixed Country Effects, 1960-1990 (N=719)
(1) (2) (3) (4)
Avg. Years of Schooling
0.23 (22.67)
0.10 (6.21)
Avg. Years of Primary Schooling
0.20 (10.28)
0.06 (2.05)
Avg. Years of Secondary Schooling
0.28 (7.62)
0.14 (5.76)
Country Effects Yes Yes Yes Yes
Year Effects No No Yes Yes
R2 .46 .46 .58 .59
Table 2 The Effects of Education on Productivity and Growth First-Difference Estimator at Various Growth Intervals (dependent variable: jty )
5-year growth (N=608)
10-year growth (N=290)
15-year growth (N=186)
20-year growth (N=101)
5-year growth, fixed effects (N=604)
10-year growth, fixed effects (N=290)
Education:
jtX 0.115 (5.07)
0.115 (5.07)
0.155 (5.23)
0.246 (5.73)
0.022 (1.32)
0.086 (2.85)
Years of schooling: jtX
0.003 (4.85)
0.003 (4.85)
0.003 (4.59)
0.004 (5.93)
0.004 (1.29)
0.009 (2.49)
Ln output/worker: ln jty
-0.004 (1.56)
-0.004 (1.56)
-0.005 (1.77)
-0.009 (2.26)
-0.043 (6.02)
-0.047 (6.03)
lnjt jtX y -0.060 (2.70)
-0.060 (2.70)
-0.041 (1.30)
-0.025 (0.57)
-0.020 (1.25)
-0.049 (2.00)
2R .332 .332 .391 .399 .287 .493 Notes: t-statistics in parentheses. Based on Summers-Heston Mark 5.6 and Barro-Lee (1993) data. All models include year effects. Effects of jtX are evaluated at the mean
level of ln jty .
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
P E
i i i l iw X B S S
0E
Study Data Geogr.
UnitInstrument βE
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. states—pattern of convergence
• 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)
910
1112
13(m
ean)
me
aned
uc
5.2
5.4
5.6
5.8
66.
2(m
ean)
logw
kwag
e
1940 1960 1980 2000year...
(mean) logwkwage (mean) meaneduc
Evoluation of mean log earnings and mean education
AL
AZ
AR
CA
COCT
DE
DC
FL
GA
ID
ILIN
IAKS
KY
LA
ME
MD
MA
MI
MN
MS
MO
MT
NE
NV
NH
NJNM
NY
NC
ND
OH
OK
OR
PA
RI
SC
SD
TN
TX
UT
VT
VA
WAWV
WI
WY
.6.8
11
.21
.4L
og
Wa
ge
Gro
wth
19
40
-20
00
4.6 4.8 5 5.2 5.4 5.61940 Log Weekly Wage
Log Weekly Wages, 1940-2000Figure 1-a: Level and Growth of Wages
IV: (1950-2000, using 1940 values)
-0.62(0.08)
AL
AZ
AR
CA
CO
CT
DE
DC
FL
GA
ID
IL
IN
IAKS
KY
LA
ME
MD
MA
MIMN
MS
MO
MT
NE
NV
NH
NJNM
NY
NC
ND
OH
OKOR
PA
RI
SC
SD
TN
TX
UT
VT
VA
WA
WV
WI
WY
34
56
Gro
wth
19
40
-20
00
7 8 9 101940 Average Schooling
Average Years, 1940-2000Figure 1-b: Level and Growth of Schooling
IV:(1950-2000, using 1940 values)
-0.83(0.05)
.2.4
.6.8
(sd)
mea
nedu
c
.1.1
5.2
.25
(sd)
logw
kwag
e
1940 1960 1980 2000year...
(sd) logwkwage (sd) meaneduc
Standard Deviation of log(earnings) and Education
AL
AZ
AR
CA
COCT
DE
DC
FL
GA
ID
ILIN
IAKS
KY
LA
ME
MD
MA
MI
MN
MS
MO
MT
NE
NV
NH
NJNM
NY
NC
ND
OH
OK
OR
PA
RI
SC
SD
TN
TX
UT
VT
VA
WAWV
WI
WY
.6.8
11
.21
.4L
og
Wa
ge
Gro
wth
3 4 5 6Schooling Growth
Log Weekly Wages and Average Yearsof Schooling, 1940-2000Figure 1-c: Growth in Wages and Schooling
OLS: 0.22(0.03)
AL
AZ
AR
CA
CO
CTDE
DC
FL
GA
ID
ILIN
IA
KS
KYLA
ME
MDMA
MI
MN
MS
MO
MT
NE
NV
NH
NJ
NMNY
NC
ND
OH
OK
OR PA
RI
SC
SD
TNTX
UT
VT
VA
WA
WV
WI
WY
-.2
-.1
0.1
.2.3
Gro
wth
19
40
-20
00
-.4 -.2 0 .21940 Level
Estimated State Specific Productvity, 1940-2000Figure 2-a: Level and Growth of TFP
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 productivity– 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:
it it t lt bc itw X T u
0 *
'
( 1)
Elt lt
lt lt lt
T E D
a v h
AL
AZ
AR
CA
COCT
DEDC
FLGA
ID
IL
INIA
KS
KY
LA
ME
MD
MA
MI MN
MS
MOMT
NE
NV
NH
NJ
NM
NY
NC
ND
OH
OK
ORPA
RI
SC
SD
TN
TX
UT
VTVA
WA
WV
WI
WY
-.1
-.0
50
.05
.1S
kill
3 4 5 6Schooling Growth
Growth in Estimated Skills and Mean Years of Schooling, 1940-2000Figure 2-c: Growth in Skills and Schooling
AL
AZ
AR
CA
CO
CT DE
DC
FL
GA
ID
IL IN
IA
KS
KYLA
ME
MDMA
MI
MN
MS
MO
MT
NE
NV
NH
NJ
NMNY
NC
ND
OH
OK
OR PA
RI
SC
SD
TNTX
UT
VT
VA
WA
WV
WI
WY
-.2
-.1
0.1
.2.3
TF
P G
row
th 1
94
0-2
00
0
-.1 -.05 0 .05 .1Skill Growth 1940-2000
Growth in Estimated Skills and State Specific Productivity, 1940-2000Figure 2-d: Growth in Skills and Local TFP
Education and Productivity Growth: U.S. States 1940-2000
10 yr growth 20 yr growth 30 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
0E
lt t lt lt ltT B Educ e
Educ
l
Includes Year FE. No overlapping periods.Figures
Social Returns to Schooling: Where Do We Stand
• Evidence for “excess” social returns is, at best, mixed– 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 ones– Important contributor to convergence in
incomes and welfare
Other Issues
• Local investments in higher education
• Empirical evidence on the signaling hypothesis