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Priorities in Post School Education: Who Benefits and who Pays?

Education is recognised to be an investment in human capital that generates benefits both for the individual – in the form of better employment prospects and higher lifetime earnings – and for society at large by increasing the skills and productivity of the labour force.

This raises issues both of efficiency and equity. Since education benefits society as a whole, then some form of public subsidy is justified on efficiency grounds, to prevent under investment and provide the skilled manpower necessary for economic growth and prosperity.

human capital

In the case of post compulsory education, the decision to continue education yields private as well as social benefits. Investment in Human Capital The idea that education represents investment in human capital, which will bring benefits in the form of increased earning power for the individual, in the same way as the purchase of a machine represents investment in physical capital, was first explored in the eighteenth century by Adam Smith:

“When any expensive machine is erected, the extraordinary work to be performed by it before it is worn out, it must be expected, will raise the capital laid out upon it, with at least the ordinary profits…

…a man educated at the expense of much labour and time to any of those employments which require extraordinary dexterity and skill, may be compared to one of those expensive machines. The work which he learns to perform, it must be expected, over and above the usual wages of common labour, will replace to him the whole expense of his education, with at least the ordinary profits of an equally valuable capital. It must do this too in a reasonable time, regard being had to the very uncertain duration of human life, in the same manner as to the more certain duration of the machine. The differences between the wages of skilled labour and those of common labour is founded upon this principle (Smith 1775: Book 1, Chapter 10).”

Concerned as he was with the power of the market, and with the way in which the forces of demand and supply interact to produce and maintain equilibrium in the market place, Adam Smith saw education primarily as a private investment. A hundred years after Smith, Alfred Marshall emphasized that education was a public as well as a private investment: “The wisdom of expending public and private funds on education is not to be measured by its direct fruits alone.

It will be profitable as a mere investment, to give the masses of the people much greater opportunities than they can generally avail themselves of… There are few practical problems in which the economist has a more direct interest than those relating to the principles on which the expense of the education of children should be divided between state and the parents’ (Marshall 1890).

Despite the notion that there are parallels between investment in human and physical capital, and that the profitability of both types of investment can be measured using the same tools of cost – benefit or rate of return analysis – there was very little economic analysis of how the costs of education should be shared between public and private sources until the 1960s when American economists such as Schultz, Dennison, Mincer and Becker seized upon the concept of investment in human capital and made it a central theme of a newly emerging branch of economic theory: the economics of education and vocational training.

Dennison (1962) was primarily interested in education as a social investment and tried to measure the contribution of education to economic growth by comparing the relative rates of growth of national income, physical capital, formation, labour force participation, and the educational level of the labour force in the US. The results suggested that at least a quarter of the observed growth of GNP in the USA between 1910 and 1960 could be explained by increases in the educational qualifications of American workers Becker (1964) and Mincer (1962) were equally interested in education and on the- job training as a private investment, and emphasized that the question of who reaps the benefits of the investment is crucial for determining who should pay for the investment.

The first attempt to measure the rate of return to investment in education in this country was by Blaug (1967) who also examined the assumptions underlying this form of cost-benefit analysis. The crucial assumptions behind the use of earnings differentials to measure the social, as opposed to the private benefits of eduction is that the higher earnings of educated workers reflect their higher productivity. The extra life-earnings of a graduate, compared with a school leaver who entered employment at 16 or 18, are therefore regarded as a measure of the higher levels of output achieved by more educated workers.

This assumption has been frequently challenged, notably by those who argue that education does not increase productivity, but simply acts as a convenient ‘screening device’ which enables employers to identify those who they believe will be more productive by virtue of superior ability, motivation, or simply a more privileged social background.

Few economists would now argue that the social rate of return, obtained by comparing the present value of the total social costs of eduction with the present value of expected life benefits in the form of increased earning capacity, is a wholly satisfactory measure of the profitability of investing public resources in post school education. Quite apart from the fact that relative earnings clearly do not perfectly reflect differences in productivity, there is the fact that no-one has yet succeeded in measuring the external or ‘spill over’ benefits to society of having a well
educated population.

This is a digest of Maureen Woodhall’s work Priorities in Post School Education.  Maureen Woodhall is a reader emeritus in education finance for the Institute of Education at the University of London, an Honorary research fellow for the Department of Education at the University of Wales Aberystwyth, and a consultant for the International Institute for Educational Planning (IIEP) and The World Bank.

(Maureen Woodhall, Priorities in Post School Education,  Handbook of educational ideas and practices, 1989, ISBN: 0415020611; pp 382 – 393)


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