Part 4 The Economics of Education. Introduction The US education crisis? US and a sample of world countries What? Input output relation Comprehensive.

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Part 4 The Economics of Education Slide 2 Introduction The US education crisis? US and a sample of world countries What? Input output relation Comprehensive analysis of the crisis need to address the following areas: Who provides education? Analyze the market for education Rationales for intervention Government failure How is education financed? Centralized v decentralized Slide 3 Introduction How significant are school resources to achievement Education production function Role of: peers, teachers, home environment, curriculum, resources Is there an achievement gap within the US? Inner city v suburban schools? Why? Significance of externality from peers Effect of urban segregation on the gap and the average achievement Sheff v ONeil and reform measures Placing the US in international context Slide 4 Education as a Publicly Provided Good K-12 education is delivered in a system of primarily public education 90% of school aged children in the US attend public schools Slide 5 International Comparison of Education Expenditure CountryExpenditure /student ($) Expenditure as % of GDP United States 88553.5 Norway 84763.9 Italy 72183.2 Australia 68943.9 Sweden 63394.9 Japan 62662.7 Netherlands 59123.2 International Comparison of Education Expenditure Slide 6 Free Market for K-12: Demand side No public schools and no regulation requiring school attendance Value placed on education: Additional earning to the individual as a result of extending education Better decision making Interpersonal relationships Pure satisfaction from learning Slide 7 Free Market for K-12: Supply Side On the supply side we assume: The market is perfectly competitive No externalities in production (MSC=MPC) Constant marginal cost Slide 8 Market for K-12 Quantity 0 $ Demand $5,000 Supply (MC) Q equilibrium Slide 9 Externalities from Education Positive externalities in consumption: the benefits from education spill over to a third party Positive externalities from: More rapid economic growth Better functioning democratic process Better safety and hygiene Greater charitable contribution Better decision making and more efficient functioning of markets Slide 10 Externalities From Education 10 Consumer 1 1 1 1 Marginal social benefit > Marginal private benefit Slide 11 Magnitude of Spillovers The absolute size of the positive externality declines as a student progresses through K-12 education. Evidence: The greatest externality occurs during the earlier years of education What does that imply about the shape of the MSB curve? Slide 12 Externalities From Education Quantity 0 $ Demand $5,000 Q equilibrium Supply (MC) MSB 2 The spillover effect is relatively small. The MSB is given by MSB 2 The market for education is efficient Slide 13 Externalities From Education Quantity 0 $ Demand $5,000 Q equilibrium Supply (MC) Q optimal MSB 1 The spillover effect is relatively large. The MSB is given by MSB 1 The market for education is inefficient Slide 14 Externalities From Education Quantity 0 $ Demand $5,000 Q equilibrium Supply (MC) Q optimal MSB 1 A subsidy of $1000 $4,000 Supply (MC) with the subsidy Slide 15 Imperfections in the Capital Market A childs education as an investment Return later in the childs life Not possible to use human capital as collateral to secure loan to finance education Financial institutions offer loans at a premium The higher than social cost of funds discourages spending on schooling Slide 16 Absence of a parent-child contract A child consumes education when he does not have the means to pay Parents more likely to finance the education of a child if the child commits to repay them in the future No such contract Parents are likely to underinvest in a childs education Slide 17 Rationale for government provision Does the need to ensure the provision of quality education justify government intervention? No Given the availability of information, the market will supply quality goods. Demand will adjust to provide quality education. If information is not available, the government can simply require information disclosure Slide 18 Rationale for government provision Do the positive externalities from education justify government intervention? Yes A subsidy that equates the MSB with the marginal cost can correct the market failure However, the existence of the externality does not necessitate public provision of education Slide 19 Rationale for government provision Does the need for Social and Cultural Cohesion justify government intervention? Yes US population is very diverse The need to share common experience to avoid breaking apart along those differences K-12 system as a melting pot Builds a shared moral framework that can hold society together Slide 20 Rationale for government provision Does the need for Social and Cultural Cohesion justify government intervention? A private education market will lead to Schools that do not necessarily perpetuate important cultural values, e.g., tolerance, equality Provision of a differentiated product: schools distinguished by a cultural, racial or religious character Segregation: schools have children with similar backgrounds Unequal opportunity for success as high income families have more options. Slide 21 Government failure Hoxby (1996) analyses the challenges of financing public schools Intervention in the education market does not necessarily result in the optimal consumption of education Inefficiencies typically present with government provision Free riding: as with any publicly provided good and especially by parents who do not have children Moral hazard: individuals will free ride when the government commits to providing a minimal amount of education- safety net Slide 22 Centralized v. Local Finance How does the government finance education? Local finance Taxes collected from a certain district Used to finance local public good Tax rate determined by the districts median voter Centralized finance Taxes imposed on statewide or nationwide tax base Redistribution across states: A district gets a share of the tax money, not necessarily equal to money collected from that district Tax rate determined by the states median voter A district has little control over tax rates or provision of public good Slide 23 Advantages of Local Finance Efficient: in combination with the Tiebout (1956) process individuals choose the tax rate and size of public good to match their preferences by moving across districts- no under provision Reduces capital market failure: parents finance 12 years of schooling through lifetime taxes Solves a principal (tax payers)-agent (school administrators)model Households unable to verify school outcome Property values direct measure of unverifiable school outcome Higher tax revenues from increased property values Slide 24 Possible Problems of Local Finance Fiscal spillovers: When taxes based on property values, people in low valued houses can free ride the median voter chooses a level of school spending that is lower than if the district was homogenous Answer: Can be solved using zoning regulation Results in human capital segregation Centralized finance leads to human capital integrated schools Answer: People will sort themselves Tiebout style if there is high correlation between demand for human capital and human capital Slide 25 The Education Production Function Empirical evidence indicates that: increasing school spending has a modest impact on achievement. Urban schools spend more per student than suburban schools yet the achievement gap persists Questions: What is the nature of the relationship between school spending and achievement? What variables determine achievement? Do scores capture educational output? Slide 26 Education Production Function How to measure achievement? Lifetime income Scores on standardized tests Graduation rates Slide 27 Education Production Function Factors affecting achievement: H: Home environment P: Peer group C:Curriculum E: Education resources T: Teacher quality Marginal gains in achievement will decrease with an increase in a single factor, holding other factors constant Slide 28 Empirical Evidence Home environment: Depends on parent income and education Educated high income parents: encourage studying, provide extra help and discourage distracting activities offer needed medical care: 50% of low income children have vision problems that interfere with their education Offer stable housing: 30% of low income children attend at least 3 different schools by third grade- only 10% for middle class kids Offer safe housing Nurturing preschool environment: Shonkoff and Phillips (2000): early childhood development has a strong impact on the ability to acquire skills which amplifies differences in school achievement Slide 29 Empirical Evidence Externalities from the peer group Favorable peers are smart, motivated, not disruptive Evidence that peer effects most important for grades 5-12 Placing a high achiever in a class of low achievers: Sund (2009) shows that low achievers have the most to gain so class average increases Placing a high achiever in a class of medium achievers: Burke and Sass (2008) shows that class average increases China, Ding and Lehrer (2007) show that medium achievers gain more (suggesting an increase in class average) than low achievers from the presence of a high achiever (which results in a decline in class average) Slide 30 Empirical Evidence Teacher quality: Significant variation in quality Quality measured by: student scores, education, experience and communication skills productive teachers have superior communication skills Graduate degrees dont significantly affect teacher quality Hanushek (2010) and Chetty et. al.(2010): Replacing an average teacher with a superior teacher increases student score 50 th percentile to 58 th and increases lifetime earning/student by $21,000 Hanushek and Rivkin (2010): if we replace the bottom 8% of teachers by average teachers, test scores increase by 45%, eliminate international achievement gap, increases GDP by $112 trillion Slide 31 Empirical Evidence Boyd (2005) a draw of home tendency In cities more openings than qualified applicants means the need to import suburban raised teachers. Only lower quality suburban teachers accept Lower quality of school building, noise, ventilation In cities higher teacher turnover Slide 32 Empirical evidence Class size Smaller classes result in higher test scores Largest benefit to minority groups Krueger (1999): reducing class size by 1/3 for 4 years: Extra cost $7400/ student Increase in lifetime earning per student $9,603 for men and $7,851 for women Benefits and costs within the same ball park Slide 33 Other Empirical Evidence Coleman (1966): the first cited. Variation in school resources (teacher student ratio, spending per student, library) has an insignificant effect on the gap between while and black children Literature on effect of spending on scores has mixed results: Krueger (1997): smaller classes matter to minority Hanushek (1997): no significant effect Hoxby (2000): using data from Connecticut also finds no effect. Slide 34 Other Empirical Evidence Rothstein (2004) examines inequality in school spending: Interstate Inequality: Range: 159% of the average in New Jersey to 61% in Mississippi. Variation in states ability to pay Federal funds 7% of school expenditure, limited ability to equalize spending Inter district inequality: due to property tax system. NY, WY, IL have the largest gaps. State funding sometimes used to equalize gaps: for example, MA spends $8, 416 in high poverty areas and $7,946 in cities and towns with fewest poor Slide 35 Achievement gap Due to the challenges facing urban schools a gap exists between rich and poor, white and minority: According to Standard and Poor (2006) reading proficiency on NAEP exam in 2005: Asians 39%, whites 37%, Blacks 11%, Hispanics 14% Economically disadvantaged 15% compared to 38% those not According to Urban Institute (2004), high school graduation rates: Suburban 73%, central city 58%, largest gap in New York, lowest rates for minority Slide 36 Reform: History The gap is caused by housing segregation, location and local funding De jure segregation up to 1954 laws required separation of black and white children across schools Brown v. Board of Education Court overturned the precedent requiring integration De facto segregation: Schools continued to be segregated even in the absence of segregation laws Slide 37 Reform: School structure Concerns about the quality of education By 1970 greater equity in distribution of school resources Concern about gap between US and other countries: National Commission on Education Excellence concerned that the US falling behind due to teacher quality, training, not enough homework, length of school day Need for competition: monopoly of local schools results in very little improvement in quality Slide 38 Reform: Competition Magnet Schools Specialized curriculum, new approach to learning Tacoma 1968 and Boston 1969 Accepted by courts to address issues of segregation Charter schools Established privately Funded by government St Paul, Minnesota 1992 Slide 39 Reform: Accountability Standards movement: Emphasized lack of accountability No Child Left Behind Act School districts develop criteria to measure performance Test each year Identify schools needing improvement Sanctions to failing schools: losing students, changing management, losing funds Slide 40 Reform: Accountability Problems with No Child Left Behind Act Output of the education production function Standardized tests do not adequately test learning Teaching to the test Limited budgets: improvement to test scores achieved by cutting funding from extracurricular activities Scores also depend on student background and social factors Harder for inner city schools to meet the standards Slide 41 Reform: School Choice Allow families to choose beyond the what is assigned Bring elements of the free market into education Families can choose Competition between schools improves quality Problems with school choice Who are the choosers? Self selection: educated and wealthy families will exercise the choice Access to information Can afford to pay extra under a voucher Those left behind Choice based on proximity to residence or work or based on composition of student body Introduces more divisions in society Slide 42 Effectiveness of the Reform Effect on: International gap Inner city suburban gap Empirical Evidence: Hoxby (2004): Charter students more proficient than student attending district school 3.8% in reading 1.6% in math Carnoy et al. (2005) and Roy and Mitchell (2005) find no significant difference: Control for income and race In general mixed results about the success of charter schools Slide 43 Effectiveness of the Reform Empirical Evidence: Gil et al. (2001) finds small gains to minority student from voucher program National Center for education statistics: children in public schools do as well after controlling for demographic variables Blueston (2008): parental background and community factors are significant Slide 44 Reform