7. Education Flashcards
Educational attainment
Educational attainment of workforce is a strong predictor of:
-labour market performance at the micro level
-degree of economic development of a country
Individuals with high levels of educational attainment
Earn more
Higher probability of being employed
Gary Becker - Human capital theory (1964)
Measured monetary returns to education
Human capital theory
Influenced by:
-individual’s innate ability
-investment in schooling
-investment in on-the-job and off-the-job training
Difference between human capital and physical capital
Property rights: human capital is embodied in persons
Workers and firms must agree on terms of use of worker’s human capital
Government spend on education as their endowment in human capital
Literature focuses on
Individual’s choice on educational attainment
Who pays for training
Measures and cross-country comparisons
Organisation of education is country specific
Within boundaries such as minimum schooling age, to acquire formal education is an investment decision
Quality of education-PISA tests
PISA - Program for International Student Assessment Test
Three year survey of 15 year olds to assess cognitive skills essential for full participation in society (reading, math, science)
-At country level - strong correlation among the three domains scores
-Mid positive relationship between education expenditures and PISA math scores
Where PISA is not measured, one can evaluate:
-pupil-teacher ratio
-ratio of average salary of teachers
-length of school year
Informal education
Never organised, no set objectives in terms of learning outcomes (learning by experience)
Formal education
Structured, explicit learning objectives
Non-formal
Rather organised, can have learning objectives but also a by-product of more organised activities that may not have learning objectives
Perfect labour markets
Individuals invest in their human capital throughout their lives, comparing cost and benefit of education.
Two costs:
-direct costs
-foregone earnings
Benefit: higher earnings in the future
Human capital model of education - Becker 1964
Direct costs
Enrolment costs to formal education, traveling lodging, purchase of books and other learning material
Foregone earnings
Loss of income insofar as the time devoted to schooling is not allocated to remunerated activity
Human capital model of education - Becker 1964
3 assumptions:
- more education —-> higher productivity
- higher productivity ——> higher wage
- Individual’s choice is based on financial considerations
General and firm specific training
On the job training:
-is costly in terms of effort
- does not involve a trade-off between getting education and getting paid
Becker identifies two types of training:
-General training
-Specific training
General training
Increases productivity - but can also be used by all firms —> firms cannot recoup their investment
Workers pay
Firm specific training
Firms will be appropriating the net-benefits from this investment —-> firms are willing to pay for it
Constrained choice of training
Precondition for training is having the resources to invest in it
If workers are not credit constrained, they will invest up to maximizing the private (and social) net benefits from training
May not be the case:
-in the presence of credit market restrictions the worker may not be able to make the investment
- employer cannot make the investment either: market failure, government may want to intervene and provide subsidies
Credit constraints generally less serious for firms than for workers:
- optimal level of investment in firm-specific training usually provided in perfect labour market
Imperfect markets: schooling as a signalling device
Employers could fail to observe the productivity of workers
Spence, 1973: education as a signal
-suppose education does not affect productivity of workers
-productivity depends only on innate ability of workers
-suppose further that workers with general innate ability find it less expensive to acquires any level of education
-education achievements can be used by high-ability workers as a signal for employers of their ability
For effective signalling, we need a separating equilibrium:
- low ability workers choose not to achieve more years education
-high ability workers choose more years education
Returns in the signalling model and over-education
Private returns to schooling are still there
Social returns to schooling are much lower in this context:
-employers can find well fitted employees more easily - improving the allocation of resources in the economy
Returns in the signalling model and over-education
Private returns to schooling are still there
Social returns to schooling are much lower in this context:
-employers can find well fitted employees more easily - improving the allocation of resources in the economy
-however, if education does not increase productivity - there is a waste of resources involved in educational systems
In this context, there can be OVER-EDUCATION: refers to over-investment in education from a social standpoint
Gov may want to offer cross-subsidies limiting investment in education
Critiques of the signalling model
Weiss and Ching-to (1993), Swinkles (1999): if hiring can be made on the same day students enrol in long a difficult courses of study, then education can no longer be used as a signalling device
Borghans et al (2011): it ignores other relevant factors alongside innate ability —–> non-cognitive skills
Cross-country comparisons
Strong relationship between education attainment and labour market status —> cannot be attributed a causal interpretation: could be that education increases productivity, hence wages and employment , or the other way around
Employment rates and earnings are substantially higher for workers with tertiary education
Education gradient in employment rates is not present in all countries, at least not for men
-skill based technology change
-job polarization
Skill based technological change
Replacing routinized jobs with machines and increasing the demand for abstract tasks requiring a high level of education
Job polarization
More employment at the two extremes of the skill distribution, induced by an increase in high skill jobs and a strong decline of medium-skill positions
Estimating the returns to schooling
Literature in last 30 years estimating returns to schooling based on Mincer-type earning functions, in which log wages are regressed against schooling and work experience - additional year of schooling adds 5-15% wage increase
Ability bias - innate ability (unobservable) plays a role
If ability induces individuals to spend more time in school , we expect lower estimates when controlling for ability bias
Evidence: accounting for different ability levels often estimate greater returns to education
Explanation 1: individuals affected by natural experiments are typically relatively low-educated individuals forced to continue schooling - estimates are not true average ones
Explanation 2: very talented individuals may estimate too high foregone earnings and decide to drop out
Natural experiments
Exploit exogenous variations in the level of schooling
e.g. increase in compulsory schooling age or draft lotteries that force some people to leave school to go to the army
Identical twins are assumed to have the same ability
Wage differences between two twins can be fully attributed to differences in educational attainments
Evidence suggests ability bias has a relatively low impact:
-Ashenfelter and Rouse (1998) find that the ability bias is only 1.4%
-Angrist (1998): Vietnam war draft lotteries ——> Earnings of veterans (drafted men - 15% lower than non-drafted men)
-Card (1995) : Distance to nearest college as instrument for likelihood to attend college (i.e. effects of proximity to college on years of schooling and income ) —-> additional year of schooling increases income of men from low income families by 13.2% to 14%
Estimating returns to schooling in the UK
Education Act, 1944: minimum school-leaving age increased from 14 to 15
Result: half the population of 14 year olds spent an additional year in school
Dolton and Sandi, 2017: fraction leaving school before 15 dropped from 60% to 10%
- 7% rate of return to education for men
General and vocational education - Hanushek et al , 2017
Assumption: gains in youth employment thanks to vocational education may offset later because of less adaptability and lower employment
Hanushek et al, 2017: use international Adult Literacy Survey (IALS) to compare age pattern of employment for those with general education and for others
Those with vocational education are more likely to be employed at an early age
Gap narrows quickly: by 50, situation is reversed
They confirm workers with a general education have a higher adaptability later on in life
Labour market returns to quality of education
France: Students finish highschool with series of written exams
pass —> go to university
fail but close to pass ——> possible oral exam
fail bad ——> retake
Canaan and Monganie, 2018: students who marginally pass the exam earn 12.5% more 10 years after the exam
On-the-job training
Frazis and Loewenstein, 2005: estimate rate of returns to formal training using US data
-60h of formal training , the median positive amount of training, increases wages by 34%
Grip and Sauermann, 2012: field experiment in a call center: workers were randomly assigned to a treatment group that had to participate in a 5-day training program
-average time a workers needs to handle a customer call as an indication of productivity
- trained workers appeared to be 10% more productive
Heterogeneity
Heterogeneity in the effects of training across various dimensions:
-across who pays for training
-across workers
-across jobs
- depending on the competition in the product market or the type of labour market
Booth and Bryan,2005: study effects of training on wages in UK and find that only employer-financed training has a positive effect on wages, offering a 10% increase
Labour market imperfections
Germany: firms voluntarily offer apprenticeships to workers entering the labour market
-firms have limited influence on the training content
- most skills learnt during the apprenticeship constitute general training
- much of the financial burden of the apprenticeship is borne by the firm —-> monopsony power allows them to reap the benefits from training
Picchio and van Ours, 2011: find that product market competition does not affect firms’ training expenditures
Instead, greater labour market flexibility significantly reduces the incentives of firms to invest in trainning
Employability and working hours
Picchio and van Ours, 2012: does on-the-job training impact employability of worker?
-firm-provided training significantly increases future employment prospects (Netherlands)
Picchio and Van Ours, 2016: relationship between firm-sponsored training and working hours
-Male part-time workers less likely to receive training than male full-time workers
-Part-time worker women as likely to receive training as full-time worker women
Because of social norms, men working part-time could send different signal to employer than women
—-> different propensity for firms to sponsor training of male part-timers over female part-timers
Should government subsidize In-Company training?
Is it optimal from a welfare point of view? If many firms provide training anyways, large DWL and low social returns
Answer depends on firms’ market power:
-other firms in the same industry may reap some or all of the benefits of investment
- if productivity goes up, there are social returns to training:
-government has a reason to intervene with subsidies
Imperfect markets: firms may have sufficient market power to provide training themselves without the government’s support
Should there be early school tracking?
School tracking: assign students to different school types based on their ability
Goal: obtain more homogenous classes
—-> increase quality —-> increase attainment
General schooling: goal: university studies
Vocational education: goal: entry into labour market
Issue: tracking may be based more on parental background and educational achievements of children —-> social mobility decreases —-> income mobility across generations increase
Inequality in achievement increase without increasing achievement levels
Interactions with other institutions
Payroll taxes: progressive taxation may reduce incentives to acquire higher education
Unions: union induced wage compression makes investment in education and training less profitable
EPL:
-may stimulate on-the-job training investment because employers re-allocate workers across jobs rather than laying them off
- makes workers more inclined to participate in training costs as they perceived their jobs to be less short-lived
Retirement plans:
-longer working life increases life-long returns from education
-on the job training may reduce the productivity loss associated with ageing —-> greater demand for older workers
-both institutions operate inter-generational redistribution, albeit in other directions
Market failures
Four main market failures:
-individuals confronted with incomplete capital markets, so they are restricted in their optimal decision making
- may be that private rate of return differs from social rate of return
- long time lag between and educational decision and its outcomes
-hold-up problem:
-once an investment in training is made by the employer, the worker can leave the firm and negotiate a higher wage somewhere else
-OR, once a worker has invested in human capital, that worker may be fired and thus unable to benefit from the investment
Room for governments to influence education and training, by making it cheaper for individuals to invest in their human capital
Skill-biased technological change
Over past decade, demand for educated workers has increased
Skill-biased tech change: replacing low-skilled routinized jobs with high-skilled jobs in which the skill content of tasks is important rather than the educational attainments per se
- Evidence of job polarization: rather than low-skilled jobs, medium skilled positions decline
-Evolving role of education: workers have to be flexible in their skill development —-> training on the job or off the job must be complementary to regular educational system
