university of oslo

University of Oslo - M.Phil Higher Education - September 2006

Economics of Higher Education

Demand for Higher Education

Thierry Chevaillier


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


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


Behaviour of the consumer

• Substitution

• Price sensitivity


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


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.”


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”


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


Education has a cost

• Tuition and fees

• Specific expenditures– Books, computer, etc.

• Extra cost of living

• Foregone earnings (Opportunity cost)


Cost-benefit analysis

– United Kingdom (Dearing report)


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


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)


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.


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


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


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


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


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


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


Higher education - OECD countries


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


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


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

university of oslo - m.phil higher education - september 2006 economics of higher education demand...

Documents

phil higher education

education families

monetary future benefits

network of connections

consumption good

extra cost

logarithm of earnings