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