University of Oslo - M.Phil Higher Education - September 2006 Economics of Higher Education Demand...
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University of Oslo - M.Phil Higher Education - September 2006
Economics of Higher Education
Demand for Higher Education
Thierry Chevaillier
University of Oslo - M.Phil Higher Education - September 2006
Higher education as a good
A good
Likely to bring• Immediate satisfaction
= consumption good• Non monetary benefits enjoyed while studying
• Future satisfaction
= Investment good• Increased earnings (monetary benefits)
• Non monetary future benefits
University of Oslo - M.Phil Higher Education - September 2006
Consumption of Higher Education
The consumption value of higher education can be based on:
• learning new things
• meeting new people
• moving to a new city
• participating in campus and student activities
• getting a status in the society
University of Oslo - M.Phil Higher Education - September 2006
Behaviour of the consumer
• Substitution
• Price sensitivity
University of Oslo - M.Phil Higher Education - September 2006
What is expected from education in the future?
• Monetary returnsExtra income expected over a lifetime
InformationRisk (health, failure, economic downturns…)
• Non-monetary returnsIntended benefits like:-A wider choice-A lifestyle- More opportunities-A network of connections
University of Oslo - M.Phil Higher Education - September 2006
How is choice made?
• Through a combination of consumption and investment decision:
“many individuals are willing to give up substantial future wage returns in order to acquire the education of their choice”
“young people tend to put more weight on the present consumption value of education than on the future income possibilities when making their educational choice.”
University of Oslo - M.Phil Higher Education - September 2006
Investing in education
• Human capital“Resources invested in Man in order to make him more productive”
• This concept can be used
At the microeconomic level– Individuals invest in their education– Families invest in their children’s education
At the macroeconomic level– “Norway invests the resources from oil in HE”
University of Oslo - M.Phil Higher Education - September 2006
Deciding to invest in education
• How investment decision are taken– - in business– - by houselolds
• Cost-benefit analysis of investment– Indicators
• Internal rates of return
• Mincer earnings function
University of Oslo - M.Phil Higher Education - September 2006
Education has a cost
• Tuition and fees
• Specific expenditures– Books, computer, etc.
• Extra cost of living
• Foregone earnings (Opportunity cost)
University of Oslo - M.Phil Higher Education - September 2006
Cost-benefit analysis
– United Kingdom (Dearing report)
University of Oslo - M.Phil Higher Education - September 2006
Internal rates of return
• Definition
The internal rate of return (IRR) of an investment is the discount rate that equates the present value of the expected lifetime stream of earnings supplement to the present value of the stream of costs
• Calculation
r such as (Et - E0) /(1+r)t = Ct /(1+r)t for t = 0 to n
University of Oslo - M.Phil Higher Education - September 2006
Mincer earnings function
• The logarithm of earnings is a function of – The amount of schooling– The amount of experience
– LnE(s,x) = a0 + rs s + b0 x + b1 x2 + e– Where s is the amount of schooling and x the amount of
experience (in years)
• Estimation of the rate of return on education– In the earnings function, the coefficient of schooling in the
earning function, rs, is the percentage change in wages associated with each additional year of schooling (Coefficients of semi-log functions are elasticities)
University of Oslo - M.Phil Higher Education - September 2006
The two methods compared
• « Mincer (1974) has provided a great service and convenience in estimating returns to education by means of the semi-log earnings function » (Psacharopoulos & Patrinos, p.3).
• The Mincer equation does not take into account the direct costs of the investment.
University of Oslo - M.Phil Higher Education - September 2006
Data used for estimating rates of return
• Cross sectional data– From census or employment surveys– Estimated for different age groups at the same date– Refers to past schooling
• Longitudinal cohort data– Follow groups of the same age over time– Are affected by variations in economic growth
University of Oslo - M.Phil Higher Education - September 2006
Private rates, social rates of return
• Private rate of returns – Use net income (after tax)– are higher than social returns in case of public subsidization
of education
• Social rate of returns – use gross income (as taxes are a social benefit)– should include cost (and benefits …) borne by others than
students and families (firms, states, local authorities…)
• Fiscal rate of return
University of Oslo - M.Phil Higher Education - September 2006
Evolution of rates of return over time
• « During the last 12 years, average returns to schooling have declined by 0.6 percentage points. At the same time, average schooling levels have increased.
• Therefore, and according to theory, everything else being the same, an increase in the supply of education has led to a slight decrease in the returns to schooling. »
• Psacharopoulos & Patrinos
University of Oslo - M.Phil Higher Education - September 2006
Comparison of rates of return across countries
Social PrivatePrimary Secondary Higher Primary Secondary Higher
Asia 16.2 11.1 11.0 20.0 15.8 18.2Europe/Middle East/ North Africa 15.6 9.7 9.9 13.8 13.6 18.8Latin America/Caribbean 17.4 12.9 12.3 26.6 17.0 19.5OECD 8.5 9.4 8.5 13.4 11.3 11.6Sub-Saharan Africa 25.4 18.4 11.3 37.6 24.6 27.8World 18.9 13.1 10.8 26.6 17.0 19.0Source: Psacharopoulos and Patrinos, World Bank 2002
University of Oslo - M.Phil Higher Education - September 2006
Comparison of rates of return across countries
• « Average returns to schooling are highest in the Latin America and the Caribbean region and for the Sub-Saharan Africa region . Returns to schooling for Asia are at about the world average.
• The returns are lower in the high-income countries of the OECD. Interestingly, average returns to schooling are lowest for the non-OECD European, Middle East
and North African group of countries. »• Psacharopoulos & Patrinos
University of Oslo - M.Phil Higher Education - September 2006
Rates of returns by level of education
• « The classic patterns of falling returns to education by level of economic development and level of education are maintained. »– Psacharopoulos & Patrinos
University of Oslo - M.Phil Higher Education - September 2006
Higher education - OECD countries
University of Oslo - M.Phil Higher Education - September 2006
Why rates of return differ
Education at a glance OCDETable A13.3. Private internal rates of return to education (1999-2000)
Males Females Males Females Males Females Males Females Males Females Males Females
Canada 8,1 9,4 8,4 10,6 -0,5 -1,3 0,6 0,6 -2,0 -2,7 1,6 2,2Denmark 13,9 10,1 7,9 5,7 -0,4 -1,0 1,1 0,7 -0,1 -0,2 5,4 4,9France 12,2 11,7 13,3 12,1 -1,6 -1,7 0,4 1,2 -0,8 -0,9 0,9 1,0Germany 9,0 8,3 7,1 7,0 -1,5 -1,6 1,1 0,6 -0,3 -0,6 2,6 2,9Italy3 6,5 m 6,7 m m m 0,5 m -0,7 m n mJapan 7,5 6,7 8,0 8,0 -0,3 -0,2 0,3 0,0 -1,6 -2,2 1,1 1,1Netherlands4 12,0 12,3 11,7 9,4 -2,0 -1,0 n 0,7 -0,6 -0,7 2,9 3,9Sweden5 11,4 10,8 9,4 7,4 -1,5 -0,7 1,2 1,6 -0,7 -0,8 3,0 3,3United Kingdom 17,3 15,2 18,1 16,4 -2,1 -2,3 0,7 0,7 -2,4 -2,3 3,0 2,7United States 14,9 14,7 18,9 18,8 -2,3 -2,0 0,9 1,4 -4,7 -6,0 2,1 2,7Country mean6 11,8 11,3 11,4 10,6 -1,3 -1,3 0,7 0,9 -1,5 -1,8 2,5 2,9
Return on tertiary education (in percentage points)2
Comprehensive private internal rate of return
Impact ofPublic student
supportLength of studies Taxes Unemployment risk Tuition fees
University of Oslo - M.Phil Higher Education - September 2006
Gender differencesEducation at a glance OCDE
Males Females Males FemalesCanada3 m m 6,8 7,9Denmark 9,3 8,7 6,3 4,2France 9,6 10,6 13,2 13,1Germany 10,2 6,0 6,5 6,9Italy4 8,4 m 7,0 mJapan 5,0 6,4 6,7 5,7Netherlands 6,2 7,8 10,0 6,3Sweden 5,2 m 7,5 5,7United Kingdom 12,9 m 15,2 13,6United States 13,2 9,6 13,7 12,3
Table A13.4. Social rates of return to education (1999-2000)Rates of return to upper secondary and tertiary education, by gender (in percentage points)
Social return in upper secondary education1
Social return in tertiary education2
University of Oslo - M.Phil Higher Education - September 2006
Further readings
• Easy:
– OECD, Human Capital investment : an international comparison, OECD-CERI, Paris 1998
• Difficult
– Blöndal S., S. Field and N. Girouard, "Investment In Human Capital Through Post-Compulsory Education and Training: Selected Efficiency And Equity Aspects" (in the compendium)
– Psacharopoulos & Patrinos, Returns… a further update (in the compendium)
• Reference:
– Carnoy M., International encyclopedia of economics of education, Elsevier, Oxford 1995