The Economics
A Sur7ey
o~
~p
BducatiJn:
the Literature
by
Cynthia A, Beniamin
Senior
Hon~r's
fro1ect
ratters)n
September, 1972
3a11 state Uni 'cerE: i ty
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Introduction
In approaching the idea of
tendency to focus one
lSi
in"estment, ,,1 th2.t i'3,
tt L; t"'le opinion
0"
in~estrnent,
t'ere is a
ie'w on v'J'hat mi::rl:t be terme·j IIc'JD,rentional
in '2'3tment in physical capital.
many economists that in'8stment in hFTIlq,n
capital is eQ1J,gllv i'1"(iorta::1t and liTarrpnts extensi'e st:Jey.
Burton A.
~eisbrod
expresses the idea that hamsl1 capital and
non-h11:n.1an capital contribute; !'to economic growt> 8no welt8.re ...
in v\'hat is probably .'In lnt:::-;rr' eD8nrl ent manner."
knOl>Tle r ! c;:e ::d a population.
iei ea of hunan caDi tal.
ha;~o
'~or
tti,3
n'Jesni te its lmportance, the
n')t :r,11yec' an iElportant 1'c18 in the
l:istr;ry or econ'Jmic thought
9.:';
it has been carried)l1 1n the
Dr~cl ucti-re Dr'lCe,;s t(ncl ec! to cle bil:i tate (,uman capital ... ,,3
-2There were critics of these attitudes held by English
economists, one of whom was Adam Smith who "clearly reco,Q:nized
the iml)Ortance of tlUTJan canltal."
However, lVIarx, a more
lnfluential critic of' classic8,l economics, "ignored human
capi tal co:npletely."
LL
,-
Historically snealdng, neople Here aware of human
capita~,
h)t Ilthe idpa did not have a major impact on economic
thought"
'J.ntil the late 1950 's.
Les ter ThurmV' fee Is that
the reasons for this omission are obvious.
of interest in economic
eljmlnatin~
problems.
~rowth.
II'I'here was a lack
Attaining full employment and
business cycles were the fundamental economic
Income redistribution was considered, but only
direct transfers (rather than a redistribution of human
capi tal) were discus~led. ,,5
The study of human canital has currently resurfaced as
a principle concern of economists, particularly in the analyses
of Gary S. Becl<:er and Theodore Schultz.
1I01Jr current
emphasi~~
Thurow states that
on the nroblems of economic g-rmoJth and
equitable distribution of income has highlighted the importance
of such analysis, for increases in skill, talents, and
knowledge have proven to be major contributors to economic
8'-'rowth •.. "
Another reason for the Ctlrrent interest in human
capi tal fo:r-mation, as seen by Thurow, is that at the present
time
..
"alte~ation
of the distribution of human capital seems to
be the politically preferred method of eliminating both
poverty and income gaps between black and white.,,6
A major component in human capital formation is education.
The role of education on income distribution is an important
-3one.
Paul C. Glick and Eerman P. Miller assert that "in
our complex industrial society, educational attainment is
one of the most important factors in determining the
occupation:=ll and income levels to which
8.
person can aspire. 11'7
3ecker and Chiswick cite evidence that Itschooling usually explains
,-
a not negligible part of the inequality in earnings within a
geographic:=ll area, and a much larger part of differences in
inequality between areas."
8
The purpose of this paper
the economics of hUman capital
on investment in education .
..
s to review the literature on
ormation with speCial focus
The Return on Investment in Education: Private
Individuals invest in education in part for the same
."
reasons that firms invest in physical capital, that is,
they expect the investment to yield a rate of return that vvill
make the investment profitable.
Mark Blaug states that
lIeducation is to some extent at least rep;arded as an investment good rather than a consumer good, because everyone
recognizes the fact that extra education generates a stream
of financial benefits in future years.
II
Thus, the theory
of investment behavior caD be used to explain the demand for
education.
I~ill
9
Economists assume that "optimizing behavior lr
govern the amount that an individual will invest in
human capital.
It is for this reason that Gary S. Becker and
Barry H. Chiswick conclude
th~t
an individual will invest
only that amount which "maximizes his economic welfare. ,1
10
There have been a number of attempts to determine the
individual rate of return on investment in education.
Conceptually, this does not appear to be a difficult problem,
but in
pra~tice
the variables determining income differentials
are extrem31y complex.
'rhe economic literature in this area
stresses both the rates of return by using different computational meLlOds and the problems involved in isolating education
from other variables vJhich determine variances in earninS':s.
The ffii3thodology involved in estimating the returns to
education 7aries froD one study to another.
-4-
The conclusions
-5drawn often depend as much upon the method used to evaluate the
data as they depend upon the data itself.
One method may
overstate :::-eturns because it takes too much into conGideration,
while another will understate returnG because it overlooks
certain benefits.
Of the various methods used to evaluate
those economic returns which a person receives through further
education, Hansen asserts that use of the "rate of return" is
a method much superior to the more conventional methods
used.
bein~
He :"eels that methods using "additional lifetime income
or present value of addi tioTI.'J_l lifetime income r1 are not ne arly
as valuable.
11
In h1:::: use of this method, Hansen observes
8_
high rate
of return to investment in schooling and attributes to this,
the basic attitude that this society has toward education.
He sees thls high rate of return as an adequate explanation
for our "t:radi tional faith in education.
an education is a pm'Terful
~veapon
fierce world which sllrrounds them.
II
To most people,
Hi th "'Thich to attack the rather
For this reason, Hansen
feels that, again reflecting a high rate of
r~turn
to education,
most indivlduals desire to "take advanta,g:e of as much
as they c an.
schoolin~
12
Ii
1110rgan and lVIarttn have found another problem in estimating
returns to education, related to the methodology used.
They
state that the number of hours that a person Horks does not
"increase :3ystematically" with the amount of education attained.
On the contrary, a "voluntary substituting of leisure for income ll
occurs in various forms.
Por this reason, they point out
that if an investigator uses "annual earnings" as a tool in
-6measuring the rate of return to education, he should beware
of these benefits Vfhich may be overlooked.
In $uch q
l1situation, the use of' qnnual earninvs hiees some of the
benefits of education.
Thoug~
a
hi~h
1113
rate of return to education has been
observed by Hansen, it might be important to know how, at
this point in time, the rate of return to education is
c ho.n[""1 nl2: .
Is it risinr;, fallin0: or staying relatively constant?
Along this line of thought, ,James Ivlorgo.n and Charles Lininger
conclude that flthe private and social value of inve;3tment
in education is
than nreir iously implied.
great~er
II
It appears
that this level of value will continue lias long as unskilled
jobs are
e=~iminated
faster than the nu=nber of unskilled li'Torkers
decline, and the demg,no for technically trained people increase
faster than the supply.1I
14
I
In an attempt to see if the '!increase in number and proportion of high school and college graduates during the pact
generation has been Gssociated with a reduction in income
differentials for the se groups,
in the lone: run,
II
it shou.ld be remembered that
if there are no changes in the demand for
workers with a higher level of education, such a reduction
would not be surprising.
we
woul~
have to conclude that the rate of return to further
education is falling.
P. Hiller
If this reduction has occurred, then
However. in the period studied by Herman
(1939-1959), both demand for and supply of highly
educB,ted workers were changing.
Thus, vJ'hen we see, from the
figures of his study, that a reduced supply of workers with
-7educations 1)elovr eighth .'Srade level had "smaller relative
income
p;airci~
tna'l l'1.igh school g:raduates II and at the same t i1Jle,
'we see that the increased supply of college .g:raduates I!did
not affect -Gheir relative income position,
II
the conchwion
dra,,'m is " that the demand for more highly educated workers
has kept paGe 'I'Ji th the incre8.i:3ed supply of tiorkers ... ,,15
In
this way, lVliller implies that the rate of return has at least
kept p9.ee,
Dr is staying rel9..tively constant.
Rensha-~v
maJ{es th8 inference that lithe real cost of
obt8.ini11,,! a hi9:her education, measured in terms of income
forcQ'one and education expenses, has been increasing 'wi th
respect to time,
16
which makes it necessary for returns to
incre9.se in order for an in'festment in education to remain as
proflta-ole as it has been.
data
~'oJh
Hmrever, he also has come IIp with
ich supports tl'1e hypothesis IIthat the returns -from
investment in higher education ho.'1e been declinin'! wi th respect
to time,
sug~esting
that the forces responsible for shifting the
supply of college i\raduates to the right have been strono.:er
than the fcrces shiftinp:: demand. n17
Observin;;r: the tightness of
the job mtu'ket for college graduates today, this hypothesis
seems to
hE~e
some very sound support.
A problem Hhich
thou[jh the
~lick
probabilit~y
and Tl1iller observe is that, e'ren
of succeeding in his financial pursult
is increased by a person's continued investment in education,
this investment does not necessarily lI.'Suarantee II the tlattainmentfl
of that person's financial
~oal.
18
A
~reat
variety of highly
personal factors Can enter in to modify and possibly reduce
-8the import9.nce of a -)articular individual's educational
attainment.
Even after
considerin~
all costs and making
allowances for IInon-educational factors affecting: schoolin,,!,fl
1fJeisbrod feels confident that evidence in the Uni ted states
indicates "formal ed'Jcation does pay in the direct form of
enhanced employment opportunities and, thus, of greater
Fis dat'~. further incJ icates that the f inanc ial
incomes. 1119
return pro::luced by ilT'TeE3tment in education is lIat least
,"lS
gre8.t tt as that return receiveo from "investment in corporate
enterprise.
It
He estimates that this educational return is
H:lTOUnd lO~ for collr~lY,e, and even more for high school and
~
.
elernen~ary
' 1 . ,,20
scnoo
vI.
Lee Hansen states, "Bas ically, the
marginal r9.tes of return rise with more schooling up to the
completion of grade 8 and then gradually falloff with the
completion of college. H21
The problem of isolating the individual's return to
education from other fO.ctors is
'1
c" tnlyblina: block which must
be recognized and overcome, for it not, returns to education
can not be 9.ccurately estimated.
ftexperienc,~.
Certain factors such as
natural o.bili ty, social
clas~3,
family connections.
and other :·{inds of education" have a defini te [3.ffect on an
• d'
. -L
J" S Income. 22
In
.1Vl(Ua_
These variables
hi~hly
complicate the
issue of II megs urinp:: :'eturns to education, for return:s 9.ttributed
to formal educgtion nay in fact be the result of one or more
of these highly per:sonal factors.
If any of these factors ';'Jere
to be sinided out by Surton':Jeisbrod and Peter Farpoff, ability
would be at the top of their list.
They see ability as a most
-9influential variable with re{(ard to "educational attainment,lI
so important that th:::y feel its effect cannot be ignored, for
if it were, the result of education in relation to earnings
would be well overstated.
To their list of influential
variables. Weisbrod and Yarpoff 1;voulc'l 8-dd such factors as
IIschool quality, per:30nal motivation, and pure chance,
II
to
mention only a few. 2'3
In addi tion to lldiversi ty in ability." Bruce 'if. Hilkinnon
sugrests "on-the-10b and off-the-job
trainin~,
market imperfections,
such ai, the lack of :m01'iJ"ledge of onportuni ties, and tradi tionbased "!iITage-salary scales" as possible factors ·which could cause
substanti.g,l \Tariations in the returns that different people
receive from the same amount of education. 24
We really don't
have enough information about the 11relationship bet"·Jeen income
and ability, the importance of on-the-job training," or the
II s ignif ica:1.ce of education in the home.
II
If
w·e could be fully
equipecl with these tools, adjustments could. be made, so that
the
influe~ce
of these factors would not be misconstrued as a
return to investment in education.
Hansen asserts that "full
adjustments for these factors would have the effect of reducing
the relati7e rates
o~
return, espeCially at the higher levels
of schoolinrr:. 1125
BecaW3e of the diverse nature of variables "relevant to
the determ:Lnation of earnings" lVeisbrod rmd
.'
bet"1;'Jeen Hh!lt they call "schoolin,0.;"
variables.
variable'~
l~arp('.f'f'
distinguish
anrl 1'n:)11-schoolinp;1I
The former have to do "\I]"i th the "quantity and qUE'.li ty
of education receivecl1 and the latter lIdescribe the personal
-10characteristics of an individual that influence earniD roc s.,,26
They "estimated that about one-fourth of the earnin::>:s
differences are attributable not to differences in educational
attainment, but to non-schooling factors ... ,,27
Assuming that a high school graduate who attends college
does actlJ.9.11y earn more than one 1.[ho ,Q:'oes to work upon !2.rad1Jation from high school, \'101fle and Smith attempt to learn "ho","J
differences in education affected the
earnin~s
of
hi~h
school
graduates ,)f equal ability or of comparable family background. ,,28
Using high school ranldng as an indicator of ability, they
tried to compare such ranks 1;ifi th the annual earnings of these
students t'ilJ'enty
year~~
later.
The hig;hest ranl;:ing individuals
were reported to have the highest incomes and the difference
in incomes increased with the amount of additional education
that individuals received "after finishing high school. 1129
From the data which
the~T
nresented, \'iolfle and Smith concluded
that "the 'nan of high abtli ty and advanced education rece i ves
substantially better relifard tr:an the man 1I[ho has one but not
both of these attributes."
30
They further conc l'll.de, even
more emphatically thrlt lithe :3.dvantage of higher education is
greate~jt for those of highest ability. ,,31
~l!eii3brod
!:md Karpoff go on to SUbstantiate this view.
Because they found a "tendency for the rate of increase of
earnings o'rer time to be larger for graduates 1<.Ti th higher class
rank,
\I
the:r conclude that those people 1;ifho have the ability
and motivation
neces~jary
to be at the top of , the class list,
are the people 'who benefi t most from an investment in hiEher
-11-
ed.ucation. 32
Rensha11 has not'3d a distinct "tendency for high i2:r ades
to be associated. Hi th increased earnings
and occupations.
II
i~'l
nearly all profess ions
In spite of the fact that high grad.es could
provide a key to financial success, Renshaw finds a p';reat
number of theE8 trbetter students" choosing a profession
HHhich almost never pro'rides entree to the highest income
bracl{ets.
In fact, he observed that nearly
I!
38?~
of "All
graduates enter into lower-pay "professions such as teaching and
the clergy. ra3
To VJeisbrod and Yarpoff, it appears that students of
different ability levels probably won't receive the same value
from a college education.
The "marginal value 11 of such education
will probably corresDond to each person's own ability.
Therefore, they urp;e that direct quotation of lIaverage financial
return ll fi,?:ures of a:tvanced ed.ucation to high school r;r8.duates
be a\"oided, since these
[}vera~~e
~ip,:l1res
may be unfair ,'?ncl
1I34
_.
"misle'ldin!T.
"
Giora Banoch believes that "there is probably a significant
posi ti're correlation betl'Ieen sl.bili ty to earn income--a
combination of natural and acquired ability traits--and the
leve 1 of schooling achieved. ,,35
Renshalv sees as a dis tinc t
possibility that "th8 more ability or natural productivity one
possesses, the more he '(,vill stan1 to benefi t from addi tional
education. ,,36
These vieHs of the influence of ability upon
returns to education might lead us to follmf the conclusions
of D.S. Bridp.;man.
His view of the income differential between
-12hi~h
school and
colle~e
graduates Was substantiated
throu~h
the study of the educ9..tional anri ability patterns of veterans
from World War II 8.ncJ f'rom studies of earnings and abili ties
o~
college
grad~ates.
He feels that ability is a major
reason for income differences between these two groups.
Conseql.l-ently. he sees a
da~l2'er
of overestimating; the IImonetary"
val1.}e of a co11ege education, for the effect of "higher
abili ty
le~rels
and ather such factors have not been q-:lequately
recognized. II)?
Weisbrod concurs that generally, those students who stay
in college have more abiIity, ambition and desire to learn.
Their family backgrounds Hill often ha,re an influence on
their ability to be Dlaced in a position after gradUation.
Their parents are more l1kely to have II,job connections!! to
get them started.
I~
evaluat1n~
incomes in relation to
additional education, it is h9..rd to distinguish tbe portion
of adell tioD9..1 income 11)"hich has been the result of these
personal f9..ctors from the portion which is the result of
more schoolin~.
3"0
Collecting data concerning 9..11 actual investment in
hUman eapital is not easily accomplished.
considering; education to be
8.
Since we are
major "investment in human
capital" 30 it seems much simpler to merely measure investment
in
educati~n.
Becke~
anrl Chiswick state that "investment in
formal education" can be roucrhly "measured by yearE.] of schooling"
}, 0
and this i~formation is easily obtained.~
-13HmlJever, in a s tud.YJonduc ted by crley Ashenfelter 8.nd Joseph
D.
~3uch
Ivlooney, it "'fIas c o:lcluded that "variables
de~ree
as profe s s ion.
level, and field of graduate study. always explained
more of the C!aTiance in
They feel that in
educ8tion, the lwe
earninQ'~3
calculatin~
0<'
than years of 7rad'c-late study.
the rates
o~
return to graduate
the 9.ctual number
0::"
yearE;
II
Of"'.T:'dl~,~te
education a', the lIsel e educatlon-related cIariable II vvoulc1
have very Ilmisleadinz!l reE;ults.
previou1..~ly
has
In striking contrast to What
been stated, they found that the l1inclw3ion
of an ability variable 8.ffected the
estimate~;
of the
coeff ic ient'? for oth or 8duc8.tion-re lated 'iPTiab18 ,; onlv L"l a
very
0:
mar~inal
1~,ivb1y
vFlrj.''3bles,
manner."
ThuE, they corjectur8 that in construct-
2ducated people
II
Fl. IInnmber of relevant control
t 1·"e LtTIe:jtj;·:::-ator "neeci not ·worry .'-lhout tbe lac 1..:
of D.n 'Jbj.Iitvi:ari8ble.
Dlnl),;lble
·~,yd
:;oncl1J~,lon,
,,L~l
If this coulrl be assuJl1ed to be
"C'rocec!ur8~~
conIc! be cOl}i3ic1 er',oly
Gior.8 J-Tanoch oo.;erJe s tb8.t there L3
bet~een
the rates
o~
q
FI
cl
i ;:-·rerenc,,,;
rEturns to whites livinx in the
~outh
south ,clT'? :,io:her tl'an tho:3:' ir the north. 42
from the 1950 (i.S. Census, Glick and Miller conclude that on
on the co11exe level, corrCSDoncJ to "increased earninp.: Dower.
Eowever, in
t~e
Case of non-whites, the
rel~tionship
between
II
on the
obt~in,
8ver~~e,
n hLrhsr return than any other
.QTOHD.
1I
4L!-
S"Jch a vari8nce in the "marginal c f'f ic iency OF investment,
betwee:1.
(1
.
II
i fferent groups of people who have invested in the
same number 0.(' years of education, lef Hanoch to postulate
factors which might lead to such R situation.
The three
major classification] of these factors as he sees them are:
"quality 0':
~;choolinr,
marg-inal marKet discriminsltion, nnn
abili ty--in a br08.d o;enss.
rv:arrrinRl cl iscriminc:!.tion is that
II
situSl.tion in which the "de;rree of discriminAtion" increases
with
t~e
Amount of
e~ucation
that a person obtains.
According to Banoch, it hgs not been 0stablished that such
discrimination actually exists and he feels that much res8arch
would have to be
to
SRY
that
11
don'~
to support its existence.
~e
o:oe ~3 on
if one is inc lir,ed to emph9s ize the environmenb'3l
and social factors,
then the disparity between the rates of
return to schooling in the two racial qroups &h1tes and non-
"\<Jhite~ CRn be 'lttrih'lted entirely to some Porm oP- iscrlminetion
1
aqainst non-whites
i~
the schools, in the current labor market,
or in the accumulated social burden. 1I45
t::J to nOli'!, in considerin0 the return5; that an inc'ividual
receives~rom
advancsd erlucation, we have been very concerned
with personal factors which may enter in to alter ths value
of inv8stment in erilJcation
~or
8
specific individual.
-1.5n~ver
We have
re8lly mentioned the significance of where this
Surely it m8.kes a
difPerence which institution one attends, otherwise people
~voul::ln
I
t 'worry so much about the schools
attend.
~raduatets
The high school
not be such an import8.nt L:;sue.
of' !fd i
tJhich the ir children
choice of schools would
Renstal,1T assertE3 that bec::3l..1se
in t"le quali ty of education, rl i
~~ferences
f:P~rence~o
in
the quality of' students, and eifferences in the quality of
home
en\jironment~)1t
dr8."t·m
to mention only
9
few
~8.ctorEl,
th? concluc;ion
shoulcl be th8.t "it m'J.kes a considerable dif'f'erence
what school one attends.
LV::
II
0
In aporoaching the topic of quality education, Richard
Raymond faces the question: what is quality education and
how Can it be :r.easured?
Contrary to v'That mig-ht seem common-
sense an(l::;asily argne8ble, he concludeE; that " ... the studentteecher
r~tio,
the percent of teachers
teachin~
in two fields,
current expend i tures. or the adequacy of Ii br'3.ry f8cili ties ...
are not ahT8.Ys accurnte indicators of quali ty.
evidence 1iV3.rrants "only a very guarded
measure quali ty,
II
u~)e
II
He fee Is that
of E;alaries to
e 1T en thoup:h he conceded th9t hig'l'o;r salaries
can have a definite positive ef:ect on the educ8tion 1iVhich
we receive. 47
In in'Jestig8tinv the qU81ity of education in different
school
Some
sys~ems,
stres~3
objectives are found to be widely varying.
col1eQ'e prepar8tory courses, while othen3 weigh
technical or voca.tiOl!al type tr"Jining more heavily.
the
invest~lgator
'Thus,
must pose the question of' the 'Tallo i ty of a
-16study which lumps such systems
quality index.
Rnymond, in
to~ether
me~surin~
to develope a
the quality of education
concentrates on the idea that the level of prenaration
higher education is a measure of qua1ity.48
~or
The
Return
--_
.
on Investment in Education:
Social
In th3 previous section we were more concerned with the
inc j.vidual benefi ts uhicv> can be obtained through flJrther
educgtion.
"In addition to these,
it is possible th0t other
sections of' the commllnity--members of the same family,
ne ifFhbour[', work collegue s or the community ing'eneral through
~overnment~l
8~encies--may
from the edUcation
to
0'
eXDerience economic
some ();:' i tr3 members.
would be macJ e in rel ation to such "wid er
:3ince any decisions
11
m'Jre on education by agencief.; such
~3pend
side-ef~ects
a~:;
the gO\fprnment
con~;equence
s" of
educating3.n individual, thec;e conseqv.ences "should be evaluated
in a simila.r m9.nner to the privAte benefits.
ing "education in economic terms,
If
11
Now in aDDro,:>,ch-
vve must realize that there
is a "need for some identification anc1 me8.surement
0"
the
communi tY-l'lide costs and bene!' its assoc iated vITi th education.
49
Those benefits 1jjhich a communi ty receives from the educ8tion
of the individuals which comprise it can be termed external
ef~ects
of education.
However, these external effects are
not always bestovTeo upon th'lt area which financed 'In individual1s education, for some of these benefits accrue to the
l1ind i'1io.ua11 solace of residence," which is a highly flexible
-'1" ')c t or.
50
Because movement from one area to 8.nother has
become an everyday, commonplace situation, problems concernin£r
the financ:Lal aspect of educ8tion have arisen.
If the distrib-
ution of educational funds is to be beth equitable and efficient,
-17-
-18the effects of migration must be consid?red.
o~
educ8ti~~
indi~iduals
The burden
may be taken on by one community,
while 8nother community will benefit, without cost to
themselves. 51
The problem could indeed be severe in an
areA- where out-migration was consistently greater tha.n
in-mirrrati cm.
Becker divides the "economic effects of educationll
into two
(1) the effect on incomes of persons receiving
p~rts:
the edUcation;
(2)
the effect on incomes of others.
In estimating lIag:zrei1:ate 30cial returns,
If
52
Mary Jean Bow·man
states that this second effect creates a definite problem.
"Arrfrregate social returns ll to education might be looked at
as the sum of individual social returns.
type
Of'
ev~luation
However, if this
is used, we are disregard ing inte:r8.ction
between individuals, that is,
disrei1:ardin~
the effect that
the educatton of one person has on the education
"The total
~)ocial
o~
another.
return may be larp-'er or smaller th;:tn the
sum of ind tvidual returns "fiewed in isolation from each
other unle:3f3 a correction for these interactions is made.
As BOlNman sees it,
1153
if we look at returns from education
in the Ion,! run, we must incltlde the effect that a parent's
education
~as
on his children.
She chooses to
re~er
to
this as a 11defferred return,
II
and a lIcontirbution ... to the future
ef-E'iciency 0:' children. f154
Education as Weisbrod sees it is
lIa means 0::' inculcating children wi th
~~tand8.rds
of SOCially
desirable attitudes and behavior and of introducin3' children
-19to new opportunities and challenges.
lI
By means of education,
our children are encoura,Q;ed to I1de',relope greater awareness
of, and ability to p8.rticip8.te effecti,cely in, the democratic
process. H55
Educ9.tion of children in the home by the ir
parents exemplifies
overlooked. 56
~
benefit of education which is often
We must take into consideration the intergener-
ational effects of education, that is, the "influence of
ec'lucation in ene generation on atti tuc.es and educ2.tional
attainments in the n3xta:eneration. ,,57
In focu~~ing on
"current" benefits s'J.ch as increased earnings, future returns
"in the form of intergeneration benefitsll are ignoreo.
is important that
thi~3
a~;l')ect
It
0" returns to investment in
education be considered along with the more obvious returns.
58
Data presented by William J. Swift and Burton A. Weisbrod
indicate th8.t the "interveneration rate of return .•. rises
as the parents
level,"
T
eduC9.tion incre8.ses thr01Jgh the high school
then drops with parents
beyond that level.
I
incre8.se in education
"Higher costs of college H and "foregone
income" are cited as reasons for this decline. 59
Ways to increase the return to society on
investment 8r8 alw9Y·'3 bein2: considerec..
education~l
Seme investigators
find that m8.ny people whose productivity could be incrased
through advanced
8dl~Cation
ne.'er make the necessary in,restment.
Unfortunately, it often happens that those who possess the
talent and abillty to :'urther their eduC!'ltion are the same
people who lack the "moti 'Jation or
'TIean~3
to do so," and those
-20-
who can afford it ar::; not able to handle advanced education
because of the 1I1ack of mantal ability" necessary Cor such
a pursui t. 60
'wolfle and Smith observed tha,t
II
many high f;chool
graduates" who are cle8rly marked as college material--as
measured by
~rades
in school Rnd performance on intelligsnce
or aptitude tests--n0ver enter college.
However, they felt
that this is caused not so much by the lack of sufficient
r'undf3 as it h; by the:; !tls,ck of ec1ucational moti-;g,tion. !;61
:;ary S. Becker also recognizes the fact that many high school
students 1/vith high Q'Tac1ef] (and/or IQ's) do not p,ttenCl
colle8:e, either foreinancial or
reasons.
He 'is
o~
~enera,l
f,g,mily backgroun:'1
the opinion that if more
o~
these high
ability students went on to college, the average return from
college could be increased.
"An improvement in the quality
of college students rlay well be 9,n
ef~~ective
contributiJn of college education to
liV-R.y to raise the
pro~ress. 62
11
A mg"iJr ,Q:'oal of bot!". education and manpovTer policies is
the proper allocation of resources.
of the
cd~cation
Qnd labor markets
The interdependence
see~
by Mark Blaug nRturally
implies that separate consideration of education and manpower
decisions Hould not be'ralU. 63
He emphasizes that tfmanpow'er
forecasts in a developea country ... must take account of the
likely expansion of ccucation.
t'
our vari ,""ble" :
Ii
His arguement
make~3
l.we of
lidemand a,nd supply in the edl.'C'3tion marl{:et,
ano demand and suppl;y in the la,bour market."
I:
one considers
that all of these ar( Gubject to a certain amount of control
by public authorities, one might say that they are all
IIpolicy variables.
tl
However, as far aE Blaug is concerned,
only supply in the education market can re8l1y be considered
8.
ilpolicy
~Iari8.ble,"
since the others are contrcrl1ed only to
a "limited ctegree. 1I61.j-
Thus, it can be ,sqid that education
does not necessarily create jobE for its graduates.
However,
if education is channeled in the right directions, the skills
vvhich empl::>yers are dernandincc of their labor force vJill be
llLabor-:orce
the skills carried away by our graduates.
~lkills
Il
cuttin:<:
ca:1. be be tter matched with Uernployer needs, II thus
::"c
C; O'IJn
on unemploYlClent .<)
.sc1 cially, econonists want to rationalize investment in
educat10n to moximize socisl return.
Investment theory
should a1d an administrator in determining the proper
allocsti on 0 i' re s ourees f or his ins ti tution.
An economist, in
aDplying eeonomic analysis to higher education, do':;s not
want to taJes r2sourc(=
G
aWAY
"rom sduco.tion
b~J
cutting costs,
but is "interested in achieving ... 'best use' of 8.'J8.ilablf::
rescurces Hithin the
~'rame1;\ror}c
If traditional in;restment
basic criteria to work with.
of
~/aluei3
tL80~y
that
t}':,'O
'3c!ministrators
i!3 "liJplied, we h.'3.,re tit>JO
The present value method can te
used when '::. decision must be mode concerning hro alternaticres
which can't; both be undertaken because o' lilited copit81.
" .. . The nrc'ject v!hose discounted prec;ent
Dursuec1 •
II
-c].'F:
is gre"ltest is
The margin9.l rsturrw methorji ..' iclss Cllloc8tinrr
-22"cap! tql h=:tT,feen any two inirestment ol1tlets in such :') 1/fay that
the returns on the
are eqllal.
II
l~lst
unit of caDi tal p18ced in each outlet
In this situation, the
US2 :ulne::.::~;
0""
the
abo~re
criteria is limited because oP the many objecti7es that an
pducatio1181 ins ti tutlon m':iY have and bec8.usc
0 f'
the dL' C' icul ty
of quantitatively evaluating its returns. 67
In order to mal'.:,:,; use of the traditional criteria, J ennE-tb
De i tCll SUi7:'';'SSts that the administrator must: irst clesl.rly
state his ob,jectiires B.nn knm'l their iTT'.portance
j
h::: shoul]
recognize ':;hose variab18s uhich p.re wi thin his control and
those which are "externally determined.
a,'lare
0:
II
Third, he must be
"lvhers relations exist between Changes in the
rele'!ant rrariables and achie';rement
0:'
the desired ob,iectives. 1168
The ",whem::;tic framework" presented for c:ealinp; Hi th the
certain r2.tiNi.
'rhe -"irst r'?tio (cost ratio) is tltlw r8.te
at which ... tvw ~lternati~!9 rl.ctirrltles m.'3y be substitut2d f'or
each other -while the total COE3ts are being held const;c:l.nt.
If
The second r"?tio (return~ ratio) is the "rate R.t which the
two varl"1.bles may be substi tut,sd
total
bene~'
-;:~or
each other 1lJhilE: the
its arA bs inrr helc1:)onstant.
II
An opt lmum OCC1JrS
when the cost ratio end returns ratio !or a particular pair
oP ob~ectives are equal.
If they are not equal, then all that
is necessary to bring about equality is substi tution
"or the other.
" •• . ic~
o::~
one
one variable's cost adv9ntage is 12:';s
thgn its rr: turns ad 'Janto.ge Ofer ano ther -.rariable, the :' irs t
-23vicerrersa. 1t69
tfnf'ortunately, the ITea~)1)ring
remains to be somewhat nf a
~roblern.
("If'
De itch fee Is that ecren
tt'.)ugh ths results mEW be "less than perfect,
will be more meanin9,: 1 ul than
..
j_ t'
benefjts
It
these results
n.) measurement 'Jf bene f' its
were attemDted. 70
Sdl.1cat:Lon plays a d lstinct role in economic gr-q,lJth and
de 'elopement.
As IDlt forth by James
Mor~8~
an~
Martin 8avid,
increased in estment in education, whether public ~r
has certain economic benef'its, and can be thought
If as yielding a SOCial rate o~' return on the inifestment.
This ;)~cial \'alne :J f' return inc Iuds s bene fits such as
s;r:reater flexibility 0f the labor Porce, the 'Talue of an
inf::,rrnecl !'3lect)rate, the greater en 4 0yment of life and
c1J.lt'J::-e, as 1o'1el1 aE.l the m':>:'3t ,obvi'lw~ benefitJf the :;.c:reater
pricneti'!i tyJf eclu.cated w:Jrkers. 71
priva~e,
The pr")cll,,-c'::.i'ci ty of workers can be much enhanced by the educatjonal
process.
1t
pro(Juce~;
"a lab"'r force t-at is m-:Jre skilled,
fiJre adaptable to t"8 needs of a changing economy, and more
likely to de'relope V"e lmaginative ideas, techniques and
products wich are critical tJ the processes of econ,rnic
expansion and social adaptation to change. n72
2:d1o'larcJ
p.
Renshaw ha:] rJbser'red that lithe trend in labor pr-,ducti vi ty is
almost identically equal to our best estimate of the trend in
educational attainment (If t r 8 labor force.
n
?3
Econ'Jmic growth can als- be considered in relation to
the quanti tv ane1 the quality ·:Jf education.
In the past, the
supply of ec111cational iJpportuni ties has been increasing at
a rapid rate.
Howe~er,
it is now no longer possible f'or this
rate of inGrease tel continue.
Edilvard F. Denison cites the
-Pact t''lat in order for the "contribution of education to
-24grov-Tth" to remain constant or increase. vve must therefore
cine! a factor vJhich 1'1ill take the place of "quantity" of
ed uc ation.
He emphas izes
th~3t
"9.
sharply 8.cce lerated
improvement in the qugli ty of edUCation Hould be nes,: eel
to pre'Ient the contribution
decll n ing.,,74
0:
education to grm'ith from
Conclusion
liThe basic questions
un~1erlying
much of the research
on the ecoc1omics of' pducational investment
on hm>! much
lOCUS
more or how much less we should be investing in education in
gener9~1 as we 11 as in 'farious spec i ic types
P
0'<>
education. 1175
The values of these nducational outputs must be weighed
ag~inst
the value Jf resources which go into the production o.c·
education.
In choosing Wh9.t time and money we should be
allocatin u to
~ducation,
"benefi t~)
costs of alternative uses" of our educational
resources.
;::lJ'lrj
we must also look towards the
Only when such factors ha-Fe been taken into
consideration, can
We:
bep;in to "choose wisely. 1176
Unfortunately, we h87e not answered the question
01"
"hC1i'l much more or hovr much less" should be in;rested in
education.
Are we uncerinvesting in education or could He
qui te poss:Lbly be ovsrim,resting in education?
conclusion:, be drawn?
Can any concrete
Along this line of thinking, Gary 3.
Becker has stated his opinion very clearly.
"The limited
a,railable f;'.:-idence dlcl not rereal any significant discrepancy
between the direct rEturns to college education and business
capital, and thus direct returns alone do not seem to justify
increasec1 eollege expend i tures.
expend i turE; S.
IV:::
II
In order to .justi fy increased
would hare to come up with some s igni f i cant
external or indirect returns to college education.
Since
the economlst'eels that litt13 is known about indirect eCrects,
-25-
-26-
and the tools :or me8.surlnrs such
eL~ects
"a firm judgement ab:)ut the extent
O!'
colle~e education is not Dossible. 77
are limi ted,
underimrestment in
Thus, in conclusion,
it must be <>aid that a great number :){ questions utill
remain unanswered.
~he
2earch for the answers to these
questions and the seqrch for new questions will ccntinue.
Schultz summarizes t'lis very aptly:
is always facing unknovffis.
"An unfinished search
'There is no royal read.
The
ril2;ht questions tel Dursue are among the unknelwns in this game.,,78
Endnotes
13urton A. Weisbrod, 11 Investinf;?: in Human Capital, II
of Human Resources, To1. 1, No.1 (Summer, 1966), p. 21.
,Jo~rnal
23urton A. Heisbrod, IIEducation and Investment in Human
Capi tal, II Journal ..2£ Political EconQ!gY, 'tol. 70, No. .5,
Part 2 (8ctober, 1962, Supolement), p. 106.
3Lester Thurmv, Investment in Human Capital (California:
Wadsworth Publishing ComD8ny, Inc., 1970), p. 3.
4rrhurmv, p. 4.
5Thurow, pp. 5-6.
6Thurow, p. 2.
7PalJl C. Clicl: 9nd Herman P. Miller, "Educational Level
and Potential Income, II American Sociological R~ieJ:I,Tol, 21,
No. J (June, 1956), p. 3,:)7.
BGary S. Becker and Barry R. ChisHick, "Education and the
II
A merlcan
'
H'
'
R
'
--.r'apers an d
-"-,conomlC
~~,
Proceed ings , 01. 56, No, 2 (f.'lay, 19bbJ, p. 300.
' t rl'b u t'lon OL- C "J::arnlngs,
'"
'
D
,1S
9IVlark Blaug, II AYl Ec,:)nomi c Interpretat ion of the Pri 'fate
Demand for Education, II Economica, 101. 33, Ho. 130 (]\}ay,
1966), p. 1(-)7.
10Becker and Chiswick, p. 359.
llW. Lee Hansen, IITotal and Pri ate Rates of Return to
Ine·estment in Schooling," ,TournaI of Political EC2!!/:'mY, ~01.71,
No. (April. 1963), p. ll-l-C.----- -- 12Hansen, P. 140.
IJTamei3 Morgan and lVlartin Da'id, "Education and Income, II
Ql)9.rterly i (iurnal of Economics ,;,Tol. 77 , No. 3 (August, 1963),
--~-,- - - - - p. -1-37.
----
14,Tame s IVlorr:can and Charles Linin.R:er, lIEducation and Income:
Comment,1! ~uarterly rournal of' Economics, '01. 78, No.2
(Hay. 196L()', D. 3l~7. - - - - - __
00
15Herm9,n F. Hiller, "Annual and Lifetime Incoro8 in Relation
to Educati:m:
1939-S9,!1 American Economic g~~!i~, ~01. 50,
No . .5 (Dec3mber, 196u), pp. 964-5.
-27-
-28/
l!J2:d~'rard ~. Ren3haH, 1t3stimating the Returns to ~ducation, It
RevisH r:~~ =:conomics 3.;.~19_ ~tsti.§tic§._L 101. 1+2, >;0. J (AU9;ust, 1(60),
p.-- 322 .. -.-
-~--~-"---'
17Renshaw, p. 322.
19~1ick and Miller.
D.
307.
19\'18 isbrocl , "In,-e:3 t inn; i:'1 Human Capital.
!I
D.
20-,
. b ro.d ,
welS
11
p. 1l.L
22RerU3hsiiJ,
II
In,-e s t in;:r in
;~1)man
Capital,
lli.
321.
P.
2:3BvrtrD A. \lJe isbrod nnd ppter YarDoff', II I~one tary Returns
to r;olleq":; Edvcation, Student Ability and College ~uality. 11
Re'iriew ::-'io'-'-"oC Sconomics 3.nci ~)tath;tics. 'oJ. . .sO, l'\:L h (lo-crem':Jer,
-,.- , ---- - '..-----.-19
I,
'J ..
,. / 1 .
--~G\'J"
2 )CJan
II
_ L "en
.. )
,
p,."
26, . .
~~elsbrod
IiiY ')
1-"
and.
..
arpoft',
p.491.
2'7',I[eisbrod and Larpoff', p. ,1./.97.
2d Dae 1 VIol fIe and Joseph C;. 'smith, liThe Cccupa tional i alue
of Sducstion f'or ~:3u1Y~rior Eip:h 3cho:::.l Grad'Uates, II ~'ourn'll of
,liiEber Ecl-l90 t,ton ,
01. 27 (April, 1956), p. 201.
20,//,J-0 J'
_1 1 e and Smith,
p. 203.
3 (Jill 0 1 fIe and. Smtth, p. 2Ci7 .
3 li,vo If'le ane! 3mtth, D. 202.
3;~'vJeLjbrod and Iarpoff, p. 1+97.
3JRensh8,H,
D.
319.
34~eisbrod and
35'~'l' '. . . ·r8
arpoff.
j
P. li92.
ual1nch 111\1' :~cnnorr'l' C Ana]Y"l'
of' Darn
l' 'no'"
1 .' _
W
.......
t-- u
Schoolin.CJ:," Journ,'3.1 o'f Human Re~jQllrce~). '01. 2. ~'IO, 3
(Sul11mer, 196~pp. 323"=4:---- -------\.~,
'.-./.
,,'
-
3 6Ren3haw,
~ ~
P.
1
~
320.
J.....
'.
- . J ' "'-J _
•
~
~~
t.
0 2 1 ' ;C'
')
:_
9.nci
-2937D. S. Brid£:man, "Problems in Estimating the
'alue 0" College ~ducation," Review $f C:~onomics and
~tatistics, '01. 42 (Supplement, 1960). P. 181.1·,
~'j()netary
3: j 'il e i sbrod,
,I
39'weisbrcd,
"In,resting in Human Capital," p. 10.
In1e sting; in Human Capi tSll,
I'
p. 12.
4C3ecker and Chiswick, p. 368.
41crl~y Ashenf'e Iter anc; ,Iose"l)h 1). IV]c,oney, "G-raduate
Sducation, Ability End E0rnin9:'s," RevielJ" of Economics and
Statistics., 'cl. 50, ~\-o. 1 (?ebruary, 1968), pp. ['5-(';".--
42Hanoc~,
p.
325.
43 Gl ick and Miller, p.
311.
44Rensha't'T, :0. 3'22.
45~anoch,
D.
327.
46Renshaw, p. 319.
47Richard Raymo'1d, flDeterminants of the Quality of
l-rimary and SeCOnd8TJ Public Education in 1v'est in':inia, 11
,Journa:b of EU1]ill1 Resources,
'01. 3, l\Io. 4 (Fall, 1968), p. 46q.
49JV:artin C I Dono:rhue, Economic Dimens ions in .2:cl~9_atj_on,
Aldin'Atherton, 1971), n. i6.
(Chicai~o:
5 C\veisbrod, IIEd'watton
SlvJe:isbrorj,
Investment inciuman Canital,
l!
D. 120.
IIEd',wation ani Imrestment in Human Canital,
II
D. 121.
'lYle!
52Garv S. Becker:' , ", nderiYllrestment in College EdUcation,"
American ~~~~ Re~ie"J, lancc!rs and Froceedings, Tal. 50,
No.2 (rv:av, 1900), p. 347.
5JfvIarv .Jean Bo'tfman, 1ISocj.al Ret1JrnS to Erl1)cation,
International SOCial Science Journal, ,01. 14, ~o. 4
TI9h2T.-D~--·647~-·--
II
---
54Bow~an, p. 658.
"In,re sting in Human CaDi tal,
11
p. 16.
"In-resting in Human Capital,1I p. lS.
57,,1'11'
,. S'iJL
' f t c~n\J
a
-'l
;vl lam ,J.
3vrton A. \,~eisbrod, nen the fiionetary
7alue o~o Sdl}caticm IS InterP-.'eneration Effects, 11 ,) ourn-)l of'
j:;01ltica15conomy, 101. 7J, :w. :5 {Oecember, 1965).0.643.
-305:3Weisbrod,
IIInIesting in Human Capital,lI D. 15.
59Swi~t and Weisbrod, p. 647.
60Glick and Miller, p. 308.
61Wolfle and Smith, p. 206.
62Becker,
"CnderinJestment in College Education," p. 354.
63 Bl au .Q;, p. 182.
64Blaug, p. 166.
L
~
O)ideisbrod,
IIIn'Jestinhr' tn Human Capital, II P. 13.
66l\enneth Deitch, IIS ome CbserIations on the Allocation
of Resources in Higher Education," Review of EC.QQ2mics .§ond
Statis~ics ,701. 42 (SuPDlement, 19bo~. 192.
6?Deitch, pp.192-3.
68Deitch, pp. 193-4.
69Deitch, pp. 194-5.
70Deitch, P. 19C3.
71Mor,gan and David, D. 423.
72We j :,brocJ.
"In',resting- in Human Capital,
11
p. 10.
73Renshaw, D. 319.
4
7 2:;dward P. Denison, "Education, Economic Growth, and
Gaps in In=ormation," Journal of Foli tical Economy, /-01. 70,
No ~ S, J:-'2crt 2 (~~ctober-,-1962:" Supplement)-: P.12?":""
75Theodore H. Schultz, "The Rate of Return in Allocating
InlTestment Resources to Edl.lcation, If Journal of Euman Resources,
it)I.
2. No. 3 (Summer. 1967). p. 293 (Introductr;n).
76Weisbrod,
"In'.'esting in Human Capital,
17
p. lI.
77Becker, "Underinvestment in College Education," p. 354.
70Theod ore itI. Schultz, The ~conomic ~lue cf Education
(New York:
Columbia University Press, 1903), D. 69.
Bibliography
1 ter, ()rley, and '. o~~eDv] ;). Honney.
lI::;raduate ~c1 ucation,
Abtlt t;il and E:;arn~Lngs. II He 'fiew 0:£' Economics and Statistics,
'10 L
~ IJ, No. 1 C"e bruarY:- 19 b8T: PP -:--78 -dh . --_. ,--
A~;henfe
Becker,'ary S. ""nrj':rin"estment in Colleg;e Education. II
Americ3.Yl Economic Re','iew, Papers 8nd :eroceedin,Q;s,01. 50,
Eo. 2 (May-:l96o';', r'Ji;'-:-'-'346- 354.
Becker, (~ary S., and Barry R. '~hiswiclL
lIEducqtlon and the
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(l'ay~' 19t5j\~
pp,
3~~"-369.
IllUl
Econ:::,mic Inter-oretation oz' the Frivate
Bmrm8.n, E'?TY ,;SOD .
"8:)ci"31 Returns to Ed-lc8,ti::m. I! I:vlternatLmal
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cl, ll~, .-=. I-J. (1962), 'po, S47-'~~59.-
Det tcr, ~'::::1neth.
I1Snme Cbser'!!:"tions on the Allocation cf
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