Economic of Education: A Review

Economic of Education: A Review
M. Woodhall

The economics of education is a branch of economic theory and investigation which has developed rapidly since the 1960s but has a much longer history. Several of the classical economists writing in the eighteenth and nineteenth century, including Adam Smith, Alfred Marshall, and John Stuart Mill, drew attention to the importance of education as a form of national investment and considered the question of how education should be financed. In the Soviet Union the Russian economist Strumilin examined “the economic significance of national education” in 1924. However, it was a revival of interest in the concept of investment in human capital which developed in the United States and the United Kingdom in the late 1850s and early 1960s that stimulated new interest in the question of the relationships between education and the economy. Since that time there has been a tremendous growth of research and publications in the area of the economics of education, including such topics as the contribution of education to economic growth, the profitability of investment in education (including estimates of the social and private returns to education), the role of educated manpower in economic development (including attempts to forecast manpower requirements), the costs of education (including questions of cost effectiveness and productivity), the finance of education, and more recently studies of the effects of education on the distribution of income and wealth.

More detailed information on all these topics is given in other articles (see Human Capital Concepts; Cost Analysis in Education; Public Finance in Education; Forecasting Manpower Requirements; Income Distribution and Education). This overview provides a brief summary of the main areas of research in the economics of education and shows how this relates to other branches of economic theory.

1. Human Capital

The concept of human capital is central to much of the research in the economics of education, and is also important in other branches of economics which at times overlap with the economics of education, particularly analysis of the labour market and employment policy, the determinants of earnings, and the distribution of income. An important distinction in economics is between investment and consumption. All expenditure can be classified as either investment or consumption, although the borderline is not always clear cut. Consumption refers to the purchase or use of goods and services which bring immediate but short-lived benefits. Investment, on the other hand, refers to the acquisition of assets which yield benefits over a long period of time. Expenditure on food, for example, must obviously be classified as consumption, whereas expenditure on buildings or equipment which will provide benefits over many years in a form of investment, and the stock of assets which will yield benefits in the future is called capital.

Economic theories of capital and investment tended to concentrate on investment in physical capital, such as buildings, factories, and machines which generate income in the form of production of goods and services. However, many economists have pointed out that education and training create assets in the form of knowledge and skills which increase the productive capacity of manpower in just the same way as investment in new machinery raises the productive capacity of the stock of physical capital. Adam Smith pointed out in 1776 in The Wealth of Nations that human educated at the expense of much labour and time…may be compared to one of those expensive machines’, and other classical economists observed that expenditure on education could be regarded as a form of investment that promised future benefits. In the early years of the twentieth century the Russian economist Strumilin (1924) and economists in the United Kingdom and Europe drew analogies between investment in education and investment in physical capital. However, it was in the period 1955 to the present day when there was such a growth of interest in the idea that expenditure on education represented investment in human capital that one writer, reviewing the theoretical and empirical work on the subject, has described it as “the human investment revolution in economic thought” (Bowman 1966). Economists such as Schultz (1961-1971) and Becker (1975) have developed and analysed the concept of human capital, treating education and training as a form of investment, producing future benefits in the form of investment, producing future benefits in the form of higher income for both educated individuals and for society as a whole.

The concept of human capital can be applied not only to education and training but to any activity which increases the quality and productivity of the labour force and thus raises future income levels. Thus expenditures on health and migration can also be regarded as investment in human capital and the question is then raised of how profitable it is for individuals or for society to invest resources in education or training, rather than in physical capital or in other form of human capital.

Techniques of cost-benefit analysis have therefore been applied to education, in order to compare the total costs of education, either to the individual or to society, with the expected returns from investment in schooling or on-the-job training. This provides a measure of the private or social rate of return to investment in education, which shows the relative profitability of education and other forms of investment for the individual (in the case of the private rate of return) or for society as a whole.

The costs of education are measured in terms of the total resources devoted to education, which economists call the opportunity cost, rather than simply the money spent on education by governments or by individuals. The opportunity cost includes the value of all the goods and services used in the education process, not only the time of teachers and other staff, the use of books, equipment, furniture, heat, light, materials, and school or college buildings, but also the time of students and pupils, which does not form part of the money costs of education, but is part of the real resources cost. The usual way of measuring the economic value of student or pupil time is in terms of earnings forgone, which represent the opportunity cost of their time. The loss of the opportunity to earn wages or salaries in the labour market is the true cost, to the individual students, of his or her decision to enrol in a full-time or part-time course of education. For the economy as a whole, the loss of the output that the student could have produced, if in employment, is part of the resource costs of education.

The benefits of education are measured in terms of the extra lifetime incomes or earnings enjoyed by educated manpower, compared with workers with lower levels of education, or illiterate workers (see Earnings and Education).

Analysis of the costs and benefits of education show that not only do educated workers receive higher wages and salaries than the less educated in a huge number of cases, but when compared with the direct and indirect costs of education, these benefits mean that education is a profitable form of investment offering returns as high or even higher than the average rate of return to physical capital. A review of cost-benefit analysis of education in 32 countries (Psacharopoulos 1973) showed that not only is education profitable but that in many cases, particularly in developing countries, the rate of return to education exceeds the rate of return to physical capital, the private rate of return is consistently higher than the social rate of return, and the rate of return to primary education is generally higher than the rate of return to secondary or higher education.

This means that, from a purely economic point of view, it is more profitable to invest additional resources in the lower levels of education than to expand higher education, although the social and private demand for higher education has expanded rapidly in recent years, particularly in less developed countries. Thus, the concept of human capital, and in particular the concept of the rate of return to investment in education, is relevant to the question of how society’s resources should be allocated between different types of investment. Comparisons between the rate of return to human capital and the returns to investment in physical capital are relevant to the question of how many resources should be devote to education or to other forms of investment in human capital such as vocational and industrial training or health care. Comparisons between the rate of return to different levels or types of education can be used as a guide to resource allocation within the educational system.

Since education is not a purely economic activity, but has many other objectives, concepts such as human capital and cost-benefit analysis can never provide a complete answer to the question of how resources should be allocated. However, the analysis of the returns to investment in education can throw some light on the question of how to allocate resources most efficiently or profitably, in other words how to maximize the returns or benefits derived from those resources. A great deal of economic theory is concerned with the vitas issue of resource allocation, since society’s resources are scarce and therefore choices must be made between alternative ways of allocating resources between competing ends.

2. Economic Efficiency

The question of how resources should be allocated in order to produce different goods and services raises the question of economic efficiency. The term efficiency can be used in many different ways, but in economics resources are said to be allocated efficiently if it is not possible to reallocate resources, that is to say increase the quantity of some goods or services at the expense of other goods or services, without reducing welfare. A whole branch of economics, known as welfare economics, has developed around the crucial question of how welfare should be defined and measured and how resources should be allocated in order to maximize welfare. The criterion of efficiency that is used as a basis for much of welfare economics is called Pareto efficiency, after the nineteenth-century Italian economist Pareto, who proposed that welfare should be defined as a condition where it is not possible to increase total utility by reallocating resources, if any reallocation which makes one group of individuals better off would make another group worse off. If it is possible to make all groups better off by changing the balance between different goods and services, then resources are not being used as efficiently as possible. If, however, any changes which benefit one group would be at the expense of another group, then welfare is already maximized, and this condition is described as Pareto optimal.

This concept is relevant to the economics of education since a large part of recent research is concerned with the question of how society’s resources should be allocated between education and other forms of investment, or between different types or levels of education, n order to maximize the economic returns. The criterion of Pareto efficiency or optimality suggests that cost-benefit analysis should be used as a guide to resource allocation, in order to show which types of investment are most profitable, and offer the highest rate of return. However, this is still a controversial question in the economics of education, since cost-benefit analysis has not succeeded in measuring all the indirect benefits of education, or of other types of social investment, so that it is not possible to identify optimality.
Nor is economic efficiency the only criterion for decisions about resource allocation. The question of equity is also important, although techniques for measuring efficiency, such as cost-benefit analysis, are not concerned with equity issues. Much recent research in the economics of education has centred on questions of equity, for example how the burden of financing education should be shared between different groups in society. This research will be summarized later in this entry, but first there are other aspects of efficiency which have been extensively explored, and which will now be summarized.

3. The Contribution of Education to Economic Growth

The question of how efficiently society’s resources are allocated is crucially linked with the concept of economic growth, usually defined as an increase in the total national income or product. Economists have tried to answer the question of how much education has contributed to economic growth (see Education and Economic Growth). One of the first was an American Economist, Edward Denison, who used the concept of a production function in order to identify the contribution of different factors of production to the increase in the national income or gross national product (GNP) of the United States between 1910 and 1960 (Denison 1962). Preliminary analysis showed that increases in the quantity of labour and physical capital in the United States did not explain the increase in GNP. There was a large “residual factor” and Denison set out to analyse the components of this residual. He suggested that improvements in the quality of the labour force, including increased education, were important, together with other factors such as technological progress and economics of scale. His analysis then led to the much publicized conclusion that increases in the level of education of the labour force accounted for as much as 23 percent of the annual rate of growth of GNP in the United States between 1930 and 1960 (Denison 1962).

Denison then went on to apply similar techniques to various European countries but his results were less clear cut. Nevertheless the results of his research have been much quoted as demonstrating the link between investment in education and economic growth, and led to a conference organized by the Organization for Economic Co-operation and Development (OECD) on “the residual factor and economic growth” (Organization for Economic Co-operation and Development 1964). However, the findings have also been extensively criticized, and it has been suggested that the residual factor is simply a measure of ignorance about the causes of economic growth.

It is now generally recognized that education does contribute to economic growth but that it is very difficult education relative to other factors. Research has now tended to shift away from attempts to quantify this towards other questions about the efficiency of resource allocation.

4. The Internal Efficiency of Education

The term “efficiency” also refers to the relationship between the inputs and outputs of a process, and can be applied to education in the same way as economists analyse the relationship between inputs and outputs in any productive process, such as manufacturing. The difference between analysing the efficiency of a school, university, or a country’s educational system is simply that it is very much more difficult to define and measure the output of education.

Nevertheless, considerable amount of research in the economics of education has been concerned with the relationship between inputs and outputs in educational institutions, or in the education system as a whole. This is normally called internal efficiency, in order to distinguish this concept of efficiency from the external efficiency of the allocation of resources within society.

A number of different economic techniques have been used to analyse the relationship between inputs and outputs in education. One of these is cost-effectiveness analysis, which is used to compare the efficiency of alternative ways of achieving the same objective. For example, comparisons between different schools, different types of institution or different teaching methods may be concerned to show which of the alternatives achieves a stated objective, or level of output, at least cost. Output may be measured in terms of pupil scores in achievement tests or examination results, or simply in terms of pupil-hours, or number of school-leavers, although such measures of output are unsatisfactory because they ignore the quality of education.

An alternative approach to cost-effectiveness analysis is to compare two or more schools or other institutions with similar levels of cost in order to identify which achieves the-highest level of output from a given quantity of inputs. Once again, however, the main problem is to find ways of measuring the quantity as well as the quantity of both inputs and outputs. Examples of cost-effectiveness analysis, for instance comparisons between full-time and part-time study, or studies of the effects of educational television, computers, or other new media on inputs and outputs (Wagner 1982) are discussed more fully in the article on cost-effectiveness analysis (see Cost-effectiveness Analysis in Education).

Another technique which is concerned with the relationship between inputs and outputs in education is productivity measurement. This also is an economic technique more usually applied to manufacturing or industrial processes, but equally relevant to education. Productivity is the relationship between inputs and outputs and is measured in term of output per unit of input. The term labour productivity is used to refer to output per person employed, while total factor productivity refers to the relationship between output and all factors of production, including labour, physical capital (such as buildings or equipment), and raw materials.

Attempts have been made to compare the productivity of education at different periods of time, in order to analyse trends in productivity. This requires information on trends in inputs and outputs, which once again raises the problem of measurement of quality, as well as quantity, of education. Because of the difficulties of measuring the quality of educational inputs and outputs, it is sometimes argued that it is impossible to measure the productivity of education. Other writers go further and suggest that “if education falls into that part of the nation’s life where productivity is not a relevant criterion, then it serves little purpose to measure it” (Vaizey et al. 1972 p. 221).

On the other hand, attempts have been made to measure productivity trends in education, despite the difficulties. As one study emphasized:

Educationists must recognize that if they deny the possibility of measuring educational output or quality this is tantamount to admitting that schools have no way of judging how successful they are in achieving whatever they set out to do. (Woodhall and Blaug 1968 p. 4)

It is recognized that it is difficult to define and measure the success of schools “in achieving whatever they set out to do”, for the simple reason that education has many different objectives, or outputs, at the same time. In economic jargon the process of transforming inputs into outputs is known as the “production function”, and research on the causes of economic growth make use of the concept of an aggregate production function, for the economy as a whole (Denison 1962). However, there is the difficulty that education represents both an input and an output; since educated manpower is one of the most important inputs of the education system is significant part of the total national product.

There have been attempts to analyse the production function of education, by examining the outputs of education compared with the inputs (for example, Alexander and Simmons 1975) but one problem is the measurement of one of the most important inputs, namely the time of pupils or students in the educational process. One solution to this problem is to measure the input of pupil time in terms of the earnings forgone by students or pupils, as a measure of the opportunity cost of their time, but once again it is difficult to make adequate allowance for variations in the quality of inputs.

The problems of relating trends in inputs to trends in the output of education are considerable, and this remains a controversial issue in the economics of education. A fuller discussion of this research is given in separate articles (see Input-Output Analysis in Education; Education Production Functions).

5. The Demand for Educated Manpower

Educated manpower is one of the most crucial inputs in the economy of any country, and in developing countries, where there is frequently a shortage of physical capital, the availability of skilled manpower may be particularly crucial. Recognition of the fact that education makes workers more productive, and the belief that shortages of skilled manpower represent one of the major constraints to economic growth in developing countries, has resulted in a great deal of research effort being devoted to the problems of forecasting demand for educated manpower.

The idea that it is possible to forecast or project a country’s manpower structure and then to use the result as a basis for planning the scale of education in order to satisfy the economic needs of the country is not only appealing, at first sight, since it appears to offer the hope of unambiguous guidance to educational planners and policy makers; it has also exerted a powerful influence over educational planning in many countries, over a number of years. Economists such as Herbert Parnes advocated educational planning based on what is usually called the manpower requirements approach. He described this in 1962 in an influential report by the OECD in the following terms:

An attempt is made to foresee the future occupational structure of the economy and to plan the educational system so as to provide the requisite numbers of personnel with the qualifications which that structure demands. (Parnes 1962 p. 15)

This approach, called variously manpower forecasting, estimating future manpower demand, or manpower requirements or needs, dominated educational planning in a number of countries for some years, and still exerts a powerful influence. One of the earliest and most comprehensive attempts to base educational planning on manpower forecasting techniques was the Mediterranean Regional Project (see The OECD’s Mediterranean Regional Project) which was established by the OECD the early 1960s in six Mediterranean countries; Greece, Italy, Portugal, Spain, Turkey, and Yugoslavia. Detailed forecasts of the manpower requirements of these countries over a 15-year period were drawn up and these forecasts were used as a basis for estimating the number of places to be provided at each level of education, together with the number of teachers and the capital expenditure that would be necessary to produce the desired rate of increase in the supply of qualified manpower.

However, many economists challenged the validity of manpower forecasting, on the grounds that the assumptions of this approach were mistaken. The underlying assumptions of any forecast of manpower demand or requirements are that:
a) There is a fixed and stable relationship between the level of educational qualifications of workers and the level of output of an industry or sector of the economy;
b) There is also a rigid relationship between the occupational structure and the educational qualifications of workers; and
c) It is therefore possible, and desirable, to make long-term forecasts of future levels of output and the occupational structure and educational qualifications of the labour force that will be needed to produce that output.

Economists who challenge these assumptions argue that it is possible to produce the same level of output with different combinations of inputs, that there are no fixed educational requirements for the majority of jobs, and it is impossible to make accurate long-term forecasts because of the problem of predicting technical change. Many who oppose the manpower forecasting approach advocate cost-benefit or rate-of-return analysis of education, on the grounds that this takes account o the possibility of varying the proportions of different inputs, including labour or capital, or qualified and less qualified manpower (i.e., the elasticity of substitution), and takes explicit account of the costs of education, which tend to be disregarded by an approach which emphasizes “requirements” or “needs”.

The controversy between the manpower forecasting approach and cost-benefit analysis attracted considerable attention during the 1970s. One attempt to evaluate manpower forecasts in eight countries concluded that:

The manpower forecasting methods in current use certainly can lead to erroneous policy decisions…there are important weaknesses in the methods that have been used to make manpower forecasts… (Which are) subject to large errors… We are, therefore, driven so the central conclusion that manpower forecasting has not so far proved to be particularly useful for educational decision-making: we may even go so far as to say that it has on occasion been positively misleading. (Ahamad and Blaug 1973 pp. 313-33)

More recently a review of experience in eleven countries (Youdi and Hinchcliffe 1985) concluded that while detailed forecasts “need to be regarded with much skepticism”, manpower analysis rather than manpower forecasting, is necessary. On the other hand, other economists are equally skeptical about the validity and accuracy of techniques of cast-benefit analysis. Blaug has summarized the controversy between advocates of a manpower forecasting approach and a cost-benefit approach to planning in term of “two views of the state of the world” (Blaug 1970). The disagreement is, fundamentally, one about the degree of flexibility in the economy and the labour market. Manpower forecasting rests on assumptions of a set of fixed or rigid relationship between inputs and outputs and between educational qualifications and jobs. Cost-benefit analysis, on the other hand, assumes flexibility and substitutability between different factors of production, not only between different types of manpower but also between labour and capital.

Research in this area now suggest that economic systems are in fact more flexible than manpower forecasters usually assume, but subject to more rigidities and market imperfections than is assumed by cost-benefit analysis. Blaug characterized the dispute in terms of two views of the state of the world, but admits “Needless to say, the real world lies somewhere in between” (Blaug 1970 p. 216).

A technical evaluation of the Mediterranean Regional Project exercise (Hollister 1967) suggested that there were greater possibilities for flexibility and substitution than were assumed in the manpower forecasts, pointed out that “the problems raised by uncertainties about productivity change (technological change) loom quite large”, and concluded that ignorance about the relationships between education and occupation is “the weakest link in the manpower requirements estimating procedures” (Hollister 1967 p. 72). Nevertheless, this evaluation did not reject manpower forecasting, but argued that instead of providing single-valued forecasts, on the basis of rigid assumptions, planners should use sensitivity analysis to test the implications of alternative assumptions and should attempt to integrate the various approaches to educational planning. Hollister concluded:

In reviewing the arguments over which “approach” to educational planning is the “right” one, it becomes clear that when one views the educational system as a whole, and, more generally, the educational complex as an element within the overall social and economic system, all of these “approaches” fit together within the logic of the total system. (Hollister 1967 p. 76)

Similarly, Blaug (1967 p. 287) argues that “social demand projections, manpower forecasting and rate of return analysis are reconcilable and in fact complementary techniques of educational planning”. In fact, the literature on the economics of education is no longer dominated by the disagreements between advocates and critics of manpower forecasting, but he dispute remains, mainly as a matter of differences in emphasis and ideology, as another review of the controversy makes clear:

Evidently both manpower planning and rate-of-return approaches have severe limitations. The contrasts between them have rots deep in the ways men look at political-economic systems and in the controls over those systems that are attempted in practice. (Anderson and Bowman 1967 p. 374)

A recent analysis of investment choices in education (Psacharopoulos and Woodhall 1985) examines all three approaches in the light of research by the World Bank.

6. The Finance of Education

Another issue in the economics of education on which there are ideological differences is the question of how education should be financed, in particular how the financial burden should be shared between the government, employers, and individuals, and what should be the balance between public and private sources of finance.

This is a question which has both efficiency and equity implications. The question of how the financial burden should be distributed raises the question of the extent of the public and private benefits of education which has already been discussed. Measures of the rate of return to educational investment relate the public or private benefits to the costs of education, and the social rate of return measures the benefits that are enjoyed by society as a whole, compared with the total resource costs of education, whereas the private rate of return includes the direct benefits that are enjoyed by the individual, compared with the costs which are borne by the individual or his or her family.

The difference between the social and the private rate of return thus reflects the degree of public subsidy of education, and since education is, in general, highly subsidized, there is usually a wide gap between social and private rates of return. If individuals were expected to contribute a greater share of the costs of education themselves, by means of fees or some other form of payment, then the gap between the social and the private rate of return would be reduced. However, there are very few cases where individual students are expected to pay the whole of the costs of their education themselves, and thus private rates of return exceed social rates of return.

In most countries a significant part of the costs of education, particularly at the primary and secondary level, are met out of general taxation or other government revenue, and pupils receive free schooling or pay low fees. In the case of private schools, fees may be a substantial or even the only source of revenue, but even in the case of private schools there is often some degree of public subsidy, either by means of tax concessions for institutions, or direct subventions for teacher salaries. In many countries fees are charge in institutions of higher education, but these are often well below the true resource costs (and therefore the social cost) of higher education. In addition many students receive financial aid in the form of scholarship, bursaries, grants, or subsidized loans, which help to reduce the financial burden of fees or of the students’ living expenses. In either case, student aid reduces the private costs of education and therefore increases the private rate of return.

Economic theory cannot answer the question of who should pay for education, but it can throw light on both the efficiency and equity implications of alternative methods of financing education. The question of how society’s resources are allocated between competing ends and whether this in efficient in terms of maximizing social welfare is, as Sect. 2 has already made clear, a crucial part of economic theory and the principle of Pareto optimality suggests one criterion for judging efficiency. However, this is not the only criterion that is relevant to the question of how education should be financed.

Since education confers financial benefits on the individual, in the form of higher lifetime earnings, the question of who pays for the education raises important questions of equity, as well as efficiency. If educational opportunities are unequally distributed, because of inequalities in the distribution of income, and hence the capacity of individuals to finance investment in education, then this will perpetuate inequalities of income in the future, since earning power is related to a worker’s education. Thus, the question of who should pay for education is closely linked to the question of equality of educational opportunity, as well as the question of equity. The title of one American book sums up the dilemma: Higher Education: Who Pays? Who Benefits? Who Should Pay? (Carnegie Commission on Higher Education 1973)

This issue has provoked considerable controversy, particularly in the United States, since one widely publicized study of the benefits, costs, and finance of public higher education in California. (Hansen and Weisbrod 1969) concluded that the general effect of public subsidies for higher education in California is to promote rather than to discourage inequalities of income. The reason is that those who are most likely to benefit from higher education are the children of upper-income families, so that the authors concluded, after analysing data on lifetime earnings differentials and relative tax burdens that subsidies for higher education involve a transfer of income from the average taxpayer to those who come from higher than average income families and who may expect to earn higher than average incomes in the future.

This research has been extensively debated in the United States and has aroused considerable controversy, as other writers have analysed similar data for California or for other states, and have come to different conclusions (Pechman 1970. Hight and Pollock 1973) More recently there has been research on the effects of education subsidies in developing countries, which also throws doubt on the assumption that providing free or subsidized higher education will benefit low-income families, since it is the sons and daughters of upper-income families who are most likely to benefit from higher education (Psacharopoulos 1977a). However, when subsidies for lower levels of education are also taken into account, it is possible that subsidies for education may contribute to a redistribution of income in developing countries (Jallade 1974) although it is not necessarily so.

Apart from studies of the distribution effects of public subsidies for education there have been a number of studies of the effects of alternative methods of financing education. The two topics that have attracted most attention are student loans and the idea of financing education by means of vouchers.

The question of whether students should receive financial aid by means of grants, loans, subsidized work-study opportunities, or a combination of different forms of aid has provoked some controversy in Europe and the United States, although the majority of countries now provide aid for student by means of a combination of grants and subsidized loans. Japan is one of the few countries where loans are used almost exclusively, and the United Kingdom is one of the few Western countries which provide only grants. Canada, the majority of European countries, and the United States provide a mixture of grants and loans, and loans are also extensively used in South America to provide financial support for students. There has been research on the effects of student loans and comparisons of different types of student support schemes in developed countries (Woodhall 1978, 1982) and the question of student aid policy in developing countries is now attracting increasing attention (see Student Loans).

The idea of financing education by means of vouchers, however, has not been widely put into practice, although it has been the subject of considerable discussion. The idea, put forward in both the United States and the United Kingdom, is that parents should be given a voucher which could be used to purchase education for their children, at the school of their choice. Schools would charge fees and the vouchers would be used to meet all or part of this cost. The role of the government would be confined to the financing of schools, rather than the actual provision of schooling, and it is argued that this would encourage competition between schools or other institutions, and would increase parental choice.

In the United Kingdom advocates of vouchers have argued that while there are strong arguments in favour of state intervention in education this need not imply state provision, and they suggest that a system of vouchers would make schools more responsive to the wishes of parents, or students, and thus increase efficiency (West 1965). In the United States there have been proposals to provide vouchers of varying value for different population groups, so that children from low-income or deprived families could be given the advantage of a compensatory voucher of higher than average value. One attempt to experiment with vouchers in the district of Alum Rock, California, was widely reported and investigated, but produced fairly ambiguous results. There is very little empirical evidence on the effects of financing education in this way.

7. Equity and Efficiency

The two criteria of equity and efficiency, which are of crucial importance in debates about education finance, are also relevant to studies of resource allocation. There has been a striking change in emphasis in recent years in many of the studies in the economics of education. One review of “recent methodological advances and empirical results” suggested that the main shift in emphasis in the economics of education was a shift of concern from efficiency to income distribution.

No one would disagree that this is the number one shift that has taken place in the economics of education. When the concept of investment in education was first discovered, in the late fifties, it was natural for researchers to try to assess the profitability of this new kind of investment. Once this curiosity had been satisfied, the next question was: what has education to do with income distribution in our society? Does schooling act as an equaliser or as a transmitter of the status quo from generation to generation? One big question…is if there exist any trade-offs between the efficiency and equity effects of education. (Psacharopoulos 1977b)

Although this question has not yet been answered, the two concerns of equity and efficiency contribute to dominate the economics of education.

8. Reviews of the Literature

This article can do no more than summarize the main areas and topics which have been studied in the economics of education n recent years. The literature is now vast, and has grown rapidly. A bibliography of the subject by Mark Blaug was first published in 1966, with nearly 800 items, but the third edition, published in 1978, contained over 2.000 annotated entries (Blaug 1978). Blaug has also written an introduction to the economics of education (Blaug 1970) which reviews research in both developed and developing countries and there are a number of American textbooks on the subject (for example, Cohn 1972) and a number of books of readings, which provide useful compendia of significant studies and research (UNESCO 1968, Blaug 1968, Baxer et al 1977). More detailed summaries of research will be foun in the individual articles to which references have been made in this overview.


Ahamad B, Blaug M (eds.) 1973. The Practice of Manpower Forecasting: A Collection of Case Studies. Elsevier, Amsterdam


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