Economics of Education

                                                       

                     

     Economics of Education

Education as an Investment in Human Capital

Human capital is the skills, training, education, knowledge, and ability possessed by workers. Education and training are means of developing human capital.

Skilled workers are those with lots of human capital; unskilled workers possess little human capital. Skilled workers receive a higher wage than unskilled workers because

 (1) skilled workers have produce more valuable output than unskilled workers and

(2) the supply of skilled workers is smaller than the supply of unskilled workers.

Spending on Education

Most of the benefits from education are private benefits: better educated workers receive higher wages. So why is K-12 education publicly funded?

external benefits of education:

• less likely to commit crime
• less likely to be on welfare
• more likely to be productive citizens who pay more in taxes than they collect in government benefits
• diversity in the classroom may foster social stability

Higher Education

Why is college so much more costly than elementary and secondary education?

College professors are paid more than elementary and secondary school teachers. College professors also teach less than elementary and secondary school teachers. Colleges have expensive libraries and laboratories.

School Reform

merit pay and tenure for teachers

• teachers tend to be paid solely on the basis of education and seniority
• cannot be fired after they have taught for a set number of years
• when pay is not based on performance, there is an incentive to do as little as possible
• tenure adds to the lack of performance incentives for older teachers

Teacher unions argue that teachers work to the best of their ability at all times and that letting principals hand out merit raises and fire bad teachers would foster cronyism. Besides, the pay of teachers is low in general.

                     Poverty in America

Measuring Poverty

A country's measure of poverty must compare relative income levels within that country. For example, someone who is comfortable in Ethiopia would be considered impoverished in the U.S.

In 2003, the poverty level for a family of 4 (2 adults and 2 children)was $18,660. About 35.9 million U.S. residents live below the poverty line. The poverty rate is 12.5%.

The percentage of poor people fell a lot during the 1960's and early 1970's. The record low poverty rate was 11.1% in 1973. It rose in the late 1970's but has fallen since.

Who are the Poor?

The incidence of poverty is unequally distributed among sections of society.

• the highest incidence of poverty occurs among those who are under age 18: 17.6% (the poverty rate for those over 65, 10.2%, is less than that for those age 18 to 64)
• the incidence of poverty is much higher among blacks (24.4%) and Hispanics (22.5%) than it is among whites (8.2%)
• the poverty rate among married couples is 5.4% while the poverty rate among female headed households is 28.0%

Causes of Poverty

• lack of a job - accounts for 3/4th of those in poverty
• place of residence - 2/3 of the poor live in big cities; 1/3 live in rural areas
• lack of education - 25% of the people with less than 8 years of schooling live in poverty

Programs to Help the Poor

Social insurance programs are designed to replace the lost income of those who worked but are now retired or disabled. Social security and Medicare are the major social insurance programs.

Income assistance programs provide money and in-kind benefits to the poor.

• Temporary Assistance to Needy Families
• Supplemental Security Income (SSI)
• Medicaid
• food stamps

Welfare Reform

• those who receive welfare benefits lose the incentive to return to work
• those who grew up on welfare become dependent on welfare into adulthood and consider it a "right"

Before 1996, 35 states had some form of workfare: require welfare recipients to accept public service jobs or participate in job training

1996 Personal Responsibility and Work Reconciliation Act:

• replaced AFDC with TANF
• lifetime 5 year limit that a recipient can be on welfare
• people on welfare for 2 years must participate in welfare to work program
• limits benefits for noncitizens and teenage mothers not living at home
• states must be more aggressive in enforcing child support payments from fathers

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