McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 34 Education

1- 2 ©2012 The McGraw-Hill Companies, All Rights ReservedMcGraw-Hill/Irwin 34-2 Chapter Outline Investments In Human Capital Should We Spend More? School Reform Issues College And University Education

1- 3 ©2012 The McGraw-Hill Companies, All Rights ReservedMcGraw-Hill/Irwin 34-3 Investments in Human Capital Human Capital: the ability of a person to create goods and services An education is an investment like any other. You incur costs early You reap rewards later Any investment only makes economic sense if the net present value (the present value of the benefits minus the present value of the costs) is positive.

1- 4 ©2012 The McGraw-Hill Companies, All Rights ReservedMcGraw-Hill/Irwin 34-4 Why Free Public Schools are not Free Taxpayers pay $650 billion in taxes to support the system. Some states and school districts have fees (such as textbook rental) that parents must pay.

1- 5 ©2012 The McGraw-Hill Companies, All Rights ReservedMcGraw-Hill/Irwin 34-5 Analyzing the Education Decision If parents had to pay the entire cost of K-12 education and chose not to send their children to school they would still incur daycare costs for their smaller children. Parents would then compare the present value of benefits to the present value of the tuition costs minus daycare costs.

1- 6 ©2012 The McGraw-Hill Companies, All Rights ReservedMcGraw-Hill/Irwin 34-6 Why Free Public School Makes Economic Sense The external benefits (the benefits to the rest of society that result from a child being educated) are such that the efficient price is zero. External benefits include the social stability that is enhanced by providing opportunity for all to succeed. the more intelligent voting population. the greater tax base associated with higher incomes. Lower crime rates

1- 7 ©2012 The McGraw-Hill Companies, All Rights ReservedMcGraw-Hill/Irwin 34-7 Modeling External Benefits Social BenefitExternal Benefits 0 Enrolled Students D S Tuition T* S* T S What Schools Get What Parents Pay

1- 8 ©2012 The McGraw-Hill Companies, All Rights ReservedMcGraw-Hill/Irwin 34-8 Should We Spend More? What we get for our $650 billion in tax money More real spending per student Lower student-teacher ratios Flat to declining SAT Verbal (recently rising SAT Math) Increasing high school graduation rates

1- 9 ©2012 The McGraw-Hill Companies, All Rights ReservedMcGraw-Hill/Irwin 34-9 More Per Student Spending (2008 Dollars)

1- 10 ©2012 The McGraw-Hill Companies, All Rights ReservedMcGraw-Hill/Irwin Lower Student-Teacher Ratios

1- 11 ©2012 The McGraw-Hill Companies, All Rights ReservedMcGraw-Hill/Irwin SATs

1- 12 ©2012 The McGraw-Hill Companies, All Rights ReservedMcGraw-Hill/Irwin Increased High School Graduation Rates

1- 13 ©2012 The McGraw-Hill Companies, All Rights ReservedMcGraw-Hill/Irwin Cautions Against Quick Conclusions Much of the increased spending has gone for Noninstructional spending (e.g. Janitors, secretaries, administration) Special education spending (more than 10% of students now qualify for special services) Some of the decline in SATs comes from more (and less academically prepared) students taking the exams. Some of the increase is graduation rates comes from GEDs, and social promotion.

1- 14 ©2012 The McGraw-Hill Companies, All Rights ReservedMcGraw-Hill/Irwin The Economic Literature on Education Spending Economists have studied the relationship between student success and spending. The majority show little relationship. Measures of success Graduation rates, standardized test scores Inputs Student-teacher ratios Teacher degree attainment Teacher salaries

1- 15 ©2012 The McGraw-Hill Companies, All Rights ReservedMcGraw-Hill/Irwin The Education Production Function Test Scores Teacher Quality/Quantity Education Production Function The flat of the curve. The argument is that in this range more spending does not increase scores.

1- 16 ©2012 The McGraw-Hill Companies, All Rights ReservedMcGraw-Hill/Irwin School Reform Issues The public school as a monopoly Lack of competition makes all monopolies less cost- and quality-conscious. The existence of tenure (the job protection for teachers with experience) and the lack of merit pay Tenured teachers are difficult to fire for poor teaching and good teachers are rarely paid more than poor ones. Evidence indicates quality teaching matters, but without merit pay, you can not use money to attract it. Private vs. Public Education and Vouchers Creating competition would stimulate cost and quality consciousness. Evidence is mixed. Collective Bargaining In most states teachers can bargain collectively and typically have relatively good (expensive) pensions.

1- 17 ©2012 The McGraw-Hill Companies, All Rights ReservedMcGraw-Hill/Irwin The Flight of Bright Women from Teaching With gender equality in hiring across more areas of employment, teaching is less attractive to bright women. Evidence suggests that fewer bright women are choosing education majors in college. more less bright women are choosing education majors in college.

1- 18 ©2012 The McGraw-Hill Companies, All Rights ReservedMcGraw-Hill/Irwin College and University Education Costs are higher than K-12 Teachers spend less time in the classroom 6 to 12 hours per week Spend time on research, committees, keeping up with the latest in their fields. Equipment and lab costs are substantially higher.

1- 19 ©2012 The McGraw-Hill Companies, All Rights ReservedMcGraw-Hill/Irwin More College Graduates

1- 20 ©2012 The McGraw-Hill Companies, All Rights ReservedMcGraw-Hill/Irwin What is a College Degree Worth? Present Value of Costs Opportunity costs of lost work time Tuition (not living expenses…you have to eat) Present Value of Benefits Increased expected earnings over a lifetime Net Present Value Estimates vary between $300,000 and $500,000 for the positive net present value