Lecture 1: wherefore econ of ed? Econ 395, Fall /6/2011

Syllabus  Contact  Prereqs  Assignments  3 Midterm Exams, no final (de-weight worst)  HW, paper  Readings  Required readings are marked by “►”  Other readings are “suggested” in a weak sense  Powerpoint notes as the central repository of expected knowledge (see “notes” to each page)  Schedule 29/6/2011

Why Econ of Ed?  An entire class on one industry!  Imagine “Economics of software”, “Economics of retail groceries”, or “Economics of cement” courses  What makes education so special that it deserves its own class?  Virtually everyone spends at least 10 years (1/8 th of their life) as students  The average person spends around 14 years in school  Recently, around 40% of people earn at least bachelor’s degrees:16 years or more  An industry that effects us all 39/6/2011

Why Econ of Ed?  “An industry that effects us all”  Let’s not beat around the bush: education is an industry and can be studied as such  In 2005, education spending represented around $800 billion, or about 7% of GDP.  In 2005, 72 million people were enrolled in school  In 2005, 9.4 million people were employed by the field of education (4.4 million are teachers)  Total government spending (state and federal) on education is greater than government spending on either national defense or health care. 49/6/2011

Why Econ of Ed?  A hugely influential part of the economy!  Virtually every well-paying job takes some sort of formal education  On-the-job-training (OTJT) is something that we won’t really discuss in this class, but easily falls under the area of “education”, and every job takes some degree of OTJT  To understand labor markets, you must understand education  Labor is an input into all goods. Therefore, the production of all goods involves education 59/6/2011

But why Economics ?  Lots of disciplines study education, most for longer than economists have  Psychology, sociology, history, anthropology, poli sci (and, of course, education folk)  So, what can economists add?  How is economics particularly useful in exploring educational issues?  Standard definition of economics: the study of allocation of scare resources among competing ends  How to best use resources - i.e., efficiency  How do we get the most gain at least cost? Most output with the least input? 69/6/2011

But why Economics ?  Efficiency  What are inputs in education? What’s the output? Is there more than one output?  The answers to these question alone are very important  Economists stress rationality and optimization  Optimization: people want to do as best as they can  Rationality: people use the best possible means to achieve their goals.  Assumes they know what they want, and know all the possible means to achieve their goals 79/6/2011

But why Economics ?  Rationality + optimization  a responsiveness to incentives.  People who behave this way will respond in predictable ways to policy changes (taxes, subsidies, etc)  Economists have useful insight into the design of educational policy, so as to increase social welfare.  The dominant framework for discussing education in economics: Human Capital (from Becker, 1964)  Human Capital: Any characteristic that makes a unit of labor more productive  Education, health, training, experience, strength, intelligence, etc. 89/6/2011

But why Economics ?  Human capital is like labor-augmenting technology.  We will cover the sub-field of labor economics  The input-output framework suggests that we are interested in how the industry organizes inputs and achieves efficiency (if at all).  We will cover the sub-field of industrial organization  Education is governmentally funded via taxation.  We will cover the sub-field of public finance 99/6/2011

Course goals  I have three-and-a-half main objectives in the class 1.Use the economic theory to explain how and why the educational system works.  How is education produced?  Why do people “get an education”?  How does education relate to economic outcomes like growth or income inequality? 2.How does the mechanism of markets interact with, and potentially improve, the educational system?  The market for teachers  School choice: the market for schools 109/6/2011

Course goals  I have three-and-a-half main objectives in the class 3.Use the analytical tools of economics/statistics to evaluate policy proposals in the field of education  What are the effects of No Child Left Behind and other “accountability” measures?  Do vouchers and charter schools “work”?  What is the best thing to spend more money on, in order to improve education?  Can we spend more money and improve education? 119/6/2011

Course goals  I have three-and-a-half main objectives in the class 3.5.Increase your comfort level in reading technical evaluations of education  If you want to understand the educational system and educational policy evaluation beyond sheer punditry, you’ve got to be able to understand the studies of the system  Involves data, statistics, experiments, surveys, etc.  There are other classes that teach these things in detail – I want to take away the “fear” of jumping into the data. We’ve got to be reality-based! 129/6/2011