Part 4 The Economics of Education

Introduction



The US education crisis?

 US and a sample of world countries  What? Input output relation 

Comprehensive analysis of the crisis need to address the following areas:

 Who provides education?    Analyze the market for education Rationales for intervention Government failure  How is education financed?

 Centralized v decentralized

Introduction

 How significant are school resources to achievement   Education production function Role of: peers, teachers, home environment, curriculum, resources  Is there an achievement gap within the US? Inner city v suburban schools? Why?

   Significance of externality from peers Effect of urban segregation on the gap and the average achievement Sheff v O’Neil and reform measures  Placing the US in international context

Education as a Publicly Provided Good



K-12 education is delivered in a system of primarily public education



90% of school aged children in the US attend public schools

International Comparison of Education Expenditure

Country

United States Norway Italy Australia Sweden Japan Netherlands

Expenditure /student ($) 8855 8476 7218 6894 6339 6266 5912 Expenditure as % of GDP 3.5

3.9

3.2

3.9

4.9

2.7

3.2

International Comparison of Education Expenditure

Free Market for K-12: Demand side

 No public schools and no regulation requiring school attendance  Value placed on education:  Additional earning to the individual as a result of extending education  Better decision making  Interpersonal relationships  Pure satisfaction from learning

Free Market for K-12: Supply Side

 On the supply side we assume:  The market is perfectly competitive  No externalities in production (MSC=MPC)  Constant marginal cost

Market for K-12

$

$5,000 Q equilibrium

Supply (MC) Demand Quantity

0

Externalities from Education

 Positive externalities in consumption: the benefits from education spill over to a third party  Positive externalities from:  More rapid economic growth  Better functioning democratic process  Better safety and hygiene  Greater charitable contribution  Better decision making and more efficient functioning of markets

Externalities From Education

Consumer 1 1 10 1 1 Marginal social benefit

>

Marginal private benefit

Magnitude of Spillovers

 The absolute size of the positive externality declines as a student progresses through K-12 education.

 Evidence: The greatest externality occurs during the earlier years of education

What does that imply about the shape of the MSB curve?

Externalities From Education

$

$5,000

MSB 2 Supply (MC)

• The spillover effect is relatively • small.

The MSB is given by MSB 2 • The market for education is efficient 0 Q equilibrium

Demand Quantity

Externalities From Education

$

$5,000

MSB 1 Supply (MC)

• The spillover effect is • relatively large.

The MSB is given by MSB 1 • The market for education is inefficient Q equilibrium Q optimal

Demand Quantity

0

Externalities From Education

$ MSB 1

A subsidy of $1000 $5,000 $4,000 0

Supply (MC)

Q equilibrium Q optimal

Supply (MC) with the subsidy Demand Quantity

Imperfections in the Capital Market

 A child’s education as an investment  Return later in the child’s life  Not possible to use human capital as collateral to secure loan to finance education  Financial institutions offer loans at a premium  The higher than social cost of funds discourages spending on schooling

Absence of a parent-child contract

 A child consumes education when he does not have the means to pay  Parents more likely to finance the education of a child if the child commits to repay them in the future  No such contract  Parents are likely to underinvest in a child’s education

Rationale for government provision

 Does the need to ensure the provision of quality education justify government intervention?

 No  Given the availability of information, the market will supply quality goods. Demand will adjust to provide quality education.

 If information is not available, the government can simply require information disclosure

Rationale for government provision

 Do the positive externalities from education justify government intervention?

 Yes  A subsidy that equates the MSB with the marginal cost can correct the market failure  However, the existence of the externality does not necessitate public provision of education

Rationale for government provision

 Does the need for Social and Cultural Cohesion justify government intervention?

 Yes  US population is very diverse  The need to share common experience to avoid breaking apart along those differences  K-12 system as a melting pot  Builds a shared moral framework that can hold society together

Rationale for government provision

 Does the need for Social and Cultural Cohesion justify government intervention?

A private education market will lead to  Schools that do not necessarily perpetuate important cultural values, e.g., tolerance, equality  Provision of a differentiated product: schools distinguished by a cultural, racial or religious character  Segregation: schools have children with similar backgrounds  Unequal opportunity for success as high income families have more options.

Government failure

  Hoxby (1996) analyses the challenges of financing public schools Intervention in the education market does not necessarily result in the optimal consumption of education   Inefficiencies typically present with government provision Free riding: as with any publicly provided good and especially by parents who do not have children  Moral hazard: individuals will free ride when the government commits to providing a minimal amount of education- safety net

Centralized v. Local Finance

 How does the government finance education?

  Local finance    Taxes collected from a certain district Used to finance local public good Tax rate determined by the district’s median voter Centralized finance     Taxes imposed on statewide or nationwide tax base Redistribution across states: A district gets a share of the tax money, not necessarily equal to money collected from that district Tax rate determined by the state’s median voter A district has little control over tax rates or provision of public good

Advantages of Local Finance

   Efficient: in combination with the Tiebout (1956) process individuals choose the tax rate and size of public good to match their preferences by moving across districts- no under provision Reduces capital market failure: parents finance 12 years of schooling through lifetime taxes Solves a principal (tax payers)-agent (school administrators)model  Households unable to verify school outcome  Property values direct measure of unverifiable school outcome  Higher tax revenues from increased property values

Possible Problems of Local Finance

  Fiscal spillovers:   When taxes based on property values, people in low valued houses can free ride the median voter chooses a level of school spending that is lower than if the district was homogenous  Answer: Can be solved using zoning regulation Results in human capital segregation  Centralized finance leads to human capital integrated schools  Answer: People will sort themselves Tiebout style if there is high correlation between demand for human capital and human capital 

The Education Production Function

  Empirical evidence indicates that:   increasing school spending has a modest impact on achievement.

Urban schools spend more per student than suburban schools yet the achievement gap persists Questions:  What is the nature of the relationship between school spending and achievement?

  What variables determine achievement?

Do scores capture educational output?

Education Production Function

 How to measure achievement?

   Lifetime income Scores on standardized tests Graduation rates

Education Production Function

  Factors affecting achievement:      H: Home environment P: Peer group C:Curriculum E: Education resources T: Teacher quality Marginal gains in achievement will decrease with an increase in a single factor, holding other factors constant

Empirical Evidence

• Home environment: • Depends on parent income and education • Educated high income parents: • encourage studying, provide extra help and discourage distracting activities • offer needed medical care: 50% of low income children have vision problems that interfere with their education • Offer stable housing: 30% of low income children attend at least 3 different schools by third grade- only 10% for middle class kids • Offer safe housing • Nurturing preschool environment: Shonkoff and Phillips (2000): early childhood development has a strong impact on the ability to acquire skills which amplifies differences in school achievement

Empirical Evidence

• Externalities from the peer group • Favorable peers are smart, motivated, not disruptive • Evidence that peer effects most important for grades 5-12 • Placing a high achiever in a class of low achievers: • Sund (2009) shows that low achievers have the most to gain so class average increases • Placing a high achiever in a class of medium achievers: • Burke and Sass (2008) shows that class average increases • China, Ding and Lehrer (2007) show that medium achievers gain more (suggesting an increase in class average) than low achievers from the presence of a high achiever (which results in a decline in class average)

Empirical Evidence

• Teacher quality: • Significant variation in quality • Quality measured by: student scores, education, experience and communication skills • • productive teachers have superior communication skills Graduate degrees don’t significantly affect teacher quality • Hanushek (2010) and Chetty et. al.(2010): Replacing an average teacher with a superior teacher increases student score 50 th percentile to 58 th and increases lifetime earning/student by $21,000 • Hanushek and Rivkin (2010): if we replace the bottom 8% of teachers by average teachers, test scores increase by 45%, eliminate international achievement gap, increases GDP by $112 trillion

Empirical Evidence

• Boyd (2005) • a “draw of home” tendency • In cities more openings than qualified applicants means the need to import suburban raised teachers. Only lower quality suburban teachers accept • Lower quality of school building, noise, ventilation • In cities higher teacher turnover

Empirical evidence

• Class size • Smaller classes result in higher test scores • Largest benefit to minority groups • Krueger (1999): reducing class size by 1/3 for 4 years: • Extra cost $7400/ student • Increase in lifetime earning per student $9,603 for men and $7,851 for women • Benefits and costs within the same ball park

Other Empirical Evidence

• Coleman (1966): the first cited. Variation in school resources (teacher student ratio, spending per student, library) has an insignificant effect on the gap between while and black children • Literature on effect of spending on scores has mixed results: • Krueger (1997): smaller classes matter to minority • Hanushek (1997): no significant effect • Hoxby (2000): using data from Connecticut also finds no effect.

Other Empirical Evidence

• Rothstein (2004) examines inequality in school spending: • Interstate Inequality: Range: 159% of the average in New Jersey to 61% in Mississippi. Variation in states ability to pay • Federal funds 7% of school expenditure, limited ability to equalize spending • Inter district inequality: • due to property tax system. • NY, WY, IL have the largest gaps. • State funding sometimes used to equalize gaps: for example, MA spends $8, 416 in high poverty areas and $7,946 in cities and towns with fewest poor

Achievement gap

• Due to the challenges facing urban schools a gap exists between rich and poor, white and minority: • According to Standard and Poor (2006) reading proficiency on NAEP exam in 2005: • Asians 39%, whites 37%, Blacks 11%, Hispanics 14% • Economically disadvantaged 15% compared to 38% those not • According to Urban Institute (2004), high school graduation rates: • Suburban 73%, central city 58%, • largest gap in New York, lowest rates for minority

Reform: History

• The gap is caused by housing segregation, location and local funding • De jure segregation up to 1954 • laws required separation of black and white children across schools • Brown v. Board of Education • Court overturned the precedent requiring integration • De facto segregation: • Schools continued to be segregated even in the absence of segregation laws

Reform: School structure

• Concerns about the quality of education • By 1970 greater equity in distribution of school resources • Concern about gap between US and other countries: • National Commission on Education Excellence concerned that the US falling behind due to teacher quality, training, not enough homework, length of school day • Need for competition: monopoly of local schools results in very little improvement in quality

Reform: Competition

• Magnet Schools • Specialized curriculum, new approach to learning • Tacoma 1968 and Boston 1969 • Accepted by courts to address issues of segregation • Charter schools • Established privately • Funded by government • St Paul, Minnesota 1992

Reform: Accountability

• Standards movement: • Emphasized lack of accountability • No Child Left Behind Act • School districts develop criteria to measure performance • Test each year • Identify schools needing improvement • Sanctions to failing schools: losing students, changing management, losing funds

Reform: Accountability

• Problems with No Child Left Behind Act • Output of the education production function • Standardized tests do not adequately test learning • Teaching to the test • Limited budgets: improvement to test scores achieved by cutting funding from extracurricular activities • Scores also depend on student background and social factors • Harder for inner city schools to meet the standards

Reform: School Choice

• Allow families to choose beyond the what is assigned • Bring elements of the free market into education • Families can choose • Competition between schools improves quality • Problems with school choice • Who are the choosers?

• Self selection: educated and wealthy families will exercise the choice • • Access to information Can afford to pay extra under a voucher • Those left behind • Choice based on proximity to residence or work or based on composition of student body • Introduces more divisions in society

Effectiveness of the Reform

• Effect on: • International gap • Inner city suburban gap • Empirical Evidence: • Hoxby (2004): Charter students more proficient than student attending district school • 3.8% in reading • 1.6% in math • Carnoy et al. (2005) and Roy and Mitchell (2005) find no significant difference: • Control for income and race • In general mixed results about the success of charter schools

Effectiveness of the Reform

• Empirical Evidence: • Gil et al. (2001) finds small gains to minority student from voucher program • National Center for education statistics: children in public schools do as well after controlling for demographic variables • Blueston (2008): parental background and community factors are significant

Reform