Returns to Education

1. Returns to Education

2. Background: Individual’s Perspective • Education is an important decision for many people • Higher levels of education can increase income streams • Higher educational attainment could also reduce the likelihood of unemployment • Higher levels of education are also associated with higher levels of health status

4. Background: Government’s Perspective • Government’s also face a decision about whether it should allocate more resources to education as well as which part of the education sector (e.g., primary/elementary, secondary, post-secondary).

5. Two Perspectives • Government • How to allocate scarce resources to education and within the education, which segment ? • Individual • How to pick an education level to maximize lifetime earnings?

6. How would the government or individual make their decisions about education? • Can view these decisions as investment decisions, so pick a “project” that has the highest return. • Calculate the rate of return (internal rate of return) that makes the present value of net benefits of schooling zero

7. Recall that the IRR is computed as follows • , …, are the benefits of education • , …,are the costs of education • For the government, if IRR > social discount rate then undertake investment in education; for an individual if IRR> interest rate undertake investment in education

8. Costs of Education: • Direct Costs: • Tution • Books • Indirect Costs • Lost wages • Benefits of Education: • Level of earnings associated with a particular level of schooling • Might also include health, but we’ll focus on earnings as a measure of benefits

9. Costs • Need to distinguish between the private and social cost • Private costs will not reflect the total costs for an individual because the government subsidizes education in Canada; the private share of costs of education does increase as level of education increases (e.g., university education requires tuition, but high school and elementary education does not) • For lower levels of educations, private costs are about 0, since government subsidizes education (e.g., no tuition or text book expenses) • Costs measure the resource costs required by the economy to produce a given level of education

10. Examples of Costs of Education • Tuition fees are much lower in 1985-86 then they are today. • Textbooks were a lot cheaper then too. • Public costs exceed private costs • Public costs for graduate degrees are also highest

11. Examples of Rates of Return to Education • Social rates of return tend to be about 3 percentage points smaller than the private rates of return. • This reflects differences in private and social costs of education • Suggests that individuals may overinvest in education because they don’t take into account the social costs

12. Examples of Rates of Return: Public vs Private • Rates of return by level education. • Highest rates of return are for secondary (high school), which suggests policies that reduce dropouts (e.g., compulsory schooling) could be quite important. • Can have some negative rates of return; e.g. the Ph.D.; might get an overinvestment in PhDs, some students would be better off stopping with the master’s degree (would increase return to a PhD)

13. By major, can see highest rates of return tend to be for Commerce, Engineering and Health Degree (doctors and dentists); reflect higher wages that individuals earn in these fields.