The Economics of Education
(Three Theories)
1. Human Capital Theory
2. Cultural Capital Theory
3. Signaling Theory
Human Capital
Theory
An Evolving View of Labor and
Education
• Classical view of labor
• Adam Smith, Wealth of Nations
• Human Capital Theory Today - Two Schools of Thought
The National Advantages of
Education
• Increased productivity
• Ability to absorb nonhuman capital
Knowledge as a Commodity
• The Unique Characteristics of Knowledge:
1.
Expandable and Self-generating
2.
Transportable and Shareable
Cost-Benefit Analysis of
Education
• Total Cost = Explicit + Implicit
• Benefits: Monetary and Non-monetary
“Back to School”: Opportunity
Cost
• Decreased probability of enrolment with higher opportunity
cost
• Opportunity cost: lost wages
• High earners take less credits than low earners
• Mature women are 35-50% more likely to enroll in higher
education
• Different opportunity costs for men and women
• Decreased likelihood of pursuing high education as age rises
• Older people take fewer credits than younger people
Home runs vs. Strike Outs
• Basic human capital theory: more is better
• General human capital in venture capital firms (VCFs):
humanities and sciences education
• Higher proportions of “home runs”
• Higher proportions of bankruptcy
• Specific human capital in VCFs: MBA, law education,
consulting experience
• Lower proportions of bankruptcy
Who wants to be a Millionaire?
• Human capital: high education degree increases payoff ~30%
• Informal human capital: # books owned, # areas of competence
• 1% more books owned yields 0.1% higher payoffs
• +5% payoffs for each additional area of competence
• Importance of networking
• Social/cultural capital: occupational diversity pays off
• Applied science degree have no advantage over lower
education degrees
• Age and gender have no effect on payoff
Cultural Capital
Theory
History
• Coined by Pierre Bourdieu in the 1970’s
• Cultural Capital
• Cultural knowledge, traits, and behaviors that effect educational
outcome
• Familiarity with the dominant culture
• Knowing the “rules of the game”
• What makes culture “capital?”
• Unequal competence
• Opportunities for exclusive advantages
• Stems largely from criteria of evaluation favoring a certain class
3 Forms of Cultural Capital
• Embodied Form
• Competence or Skill
• Objectified Form
• Objects whose use presupposes a skill set
• Institutionalized Form
• The “money” of cultural capital
Main Points of Cultural Capital
Theory
• Parental cultural capital is inherited by children
• Children’s cultural capital is converted into educational
credentials
• Educational credentials are a major mechanism of social
reproduction
Educational
Tracking/Streaming
• Research has shown educational tracking mirrors one’s
parents’ cultural capital.
• Ways of tracking
• Inter-school
• Intra-school (streaming)
• Economics of Tracking
•
•
•
•
Efficiency?
Equality of opportunity?
Peer Group Effects
Goal of tracking:
• Increase output in terms of aggregate wages
Strengths and Weaknesses of
Tracking
• Strengths
• Allows teachers to direct lessons towards ability
• Pushes for higher achievement of students with cultural capital
• Weaknesses
• Reinforces class inequality
• Disadvantages to low-track students
• Stigmatization of low-track students
Cultural Capital Decisions
• Cultural Capital Theory as a combination of strategic games
• Decision to invest in cultural capital
• Coordination game
• Decision to track students into high or low-tracks
• Decision to attend an institution of higher education
• Balance of skilled and unskilled job markets
• Opportunity cost of going to college
Education as a
signal
Signaling hypotheses
• Strong hypothesis: Education is used exclusively as a
signal.
• Weak hypothesis: The primary role of education is to
signal, but it may also improve employee productivity .
Signaling
• The cost of purchasing or obtaining a job market signal is
referred to as a signaling cost.
• The signaling cost of education varies depending on the
institution, time investment, and cost of attendance.
• Signaling costs can be regarded as opportunity costs
since the time and resources invested in obtaining an
education can potentially be used for other purposes.
Hiring employees
• Employers try to distinguish between workers based on
characteristics.
• There are fixed and alterable characteristics about a
person.
• Fixed characteristics include race and gender because
they can not be changed.
• Alterable characteristics include education because an
individual can determine how much time and money to
invest in it.
Employer decisions
• The employer will pay a higher wage to a good
employee.
• Employers do not have the all information to determine
how an employee will preform since many jobs involve
training.
• Thus, hiring an employee is an investment decision, since
there is uncertainty about worker capacity.
Bad vs. Good employees
• A bad employee will try to take advantage that the
employer does not have enough information to
determine if they are a good or bad worker.
• However, good employees want to distinguish
themselves and receive a higher pay for their
productivity.
• Good employees invest in signals such as education
because education is an alterable characteristic.
• Therefore, employers believe people who invest in
education are likely good workers.
Productivity Benefits
• While education benefits society from a cultural and
intellectual standpoint, it provides almost no benefit to
workforce productivity.
• Higher education institutions with the exception of
vocational schools do not teach practical workplace skills.
• Total worker productivity would increase if the focus of
education shifted from traditional academics to
productivity enhancement and skill-building.
• Currently education is still beneficial to both parties as a
distinguishing factor between worker productivity.
Bibliography
• http://eprints.ioe.ac.uk/1869/1/Sullivan2001Cultural_Capitaltext.pdf
• http://www.cesifo-group.de/portal/pls/portal/docs/1/1197222.PDF
• http://www.economics.harvard.edu/faculty/staiger/files/HanushekRivkinKain%2BEcta%2B
2005.pdf
• http://journals.cambridge.org/action/displayFulltext?type=1&fid=87054&jid=SOC&volume
Id=35&issueId=04&aid=87053
• http://www.williambowles.info/mimo/refs/tece1ef.htm
• http://www.econ.yale.edu/seminars/apmicro/am03/fryer-030403.pdf
• http://www.sciencedirect.com/science/article/pii/S0378873310000572
• http://www.sciencedirect.com/science/article/pii/S0883902604000035
• http://www.sciencedirect.com/science/article/pii/S0272775711001725
• The American Economic Review, Investment in Human Capital, by Theodore Schultz
• http://www.ffst.hrENCYCLOPAEDIAdoku.phpid=human_capital_theory_and_education
• http://www.econ.yale.edu/~dirkb/teach/pdf/spence/1973%20job%20market%20signalling
.pdf