ECONOMICS OF EDUCATION

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ECONOMICS OF EDUCATION

Faculty of Social Sciences, E ö tv ö s Lor á nd University Budapest (ELTE) Department of Economics, E ö tv ö s Lor á nd University Budapest

Institute of Economics, Hungarian Academy of Sciences Balassi Kiad ó , Budapest

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2 Author: Júlia Varga Supervised by Júlia Varga

June 2011

Week 4

Cost- Benefit Analysis in Education 1 Direct returns to education

(at least partly)

education results in direct, measurable returns to the individual and society

Benefit – cost analysis methods

1. Internal rate of return analysis 2. Net present value analysis

1. Internal rate of return to education - r

∑

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=

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= + +

− ⁿ

t

t t S S

n

t

t t S S

r C W

r W W

1 1 1

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3 Private rate of return → measure of private profitability of investment in education

Social rate of return → measure of the profitability of alternative investments from the society’s perspective (society ≠ government)

Fiscal rate of return ® mesure of the profitability of investment in education to government

Internal rate of return to education – the short- cut method

Only rough preliminary calculations

)

( 1

1 C W

S

W r W

h h h

h

+

= −

−

S→ length of studies at h level of education

C → annual direct costs of

education

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4 Internal rate of return to education – the full or elaborate method

∑

=

− +

=

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+

= + +

− ^j

t

t t S S

n

j t

t t S S

r C W

r W W

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Both private, social and

fiscal rate of return can be

calculated with full method

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5 Private and social costs

DIRECT COSTS Social Private

1) Direct public spending on education per student

+ -

2) Amortized capital costs on education per student

+ -

3) School fees, all kinds -

transfer, not counted

+

4) Other private school related expenditure (books, supplies, transportation etc.)

+ +

5) Student support (scholarship. stipends, bursaries, allowances, etc.)

-

transfer, not counted

deduct from foregone

earnings

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6 INDIRECT COSTS Social Private

6) Foregone earnings W S-1 Before tax After tax

7) Part time earnings of students Before tax Deduct from earnings

After tax Deduct from earnings 8) Costs of tax exemption + -

9) Implicit rent and depreciation + -

Social Private

Incremental income attributable to education (W S - W S-1 )

Before tax After tax

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7 Benefits and costs for fiscal rate of return calculations

Benefits

additional income tax and social contribution revenues from higher wages Costs: 1) Direct costs

direct public spending per student from public sources 2) Indirect costs

lost income tax revenue and social contribution on students’ foregone earnings

Measurement problems 1

1. Cross-section versus life cycle (cohort) data 2. Annual earnings versus hourly wages 3. Adjustments

probability of unemployment/inactivity mortality

impact of repetition

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8 Cross-section data

4 5 . 4 4 . 4 3 . 4 2 . 4 1 . 4 0 . 3 9 . 3 8 . 3 7 . 3 6 . 5 3 3 5 . 3 4 . 5 1 3 3 . 3 2 . 3 1 . 4 8 3 0 . 2 9 . 4 6 2 8 . 2 7 . 2 6 . 2 5 . 2 4 . 2 3 . 2 2 . 2 1 . 3 8 2 0 . 1 9 . 1 8 . 1 7 . 1 6 . 1 5 . 1 4 . 1 3 . 1 2 . 1 1 . 1 0 . 9 . 8 . 7 . 6 . 5 . 4 . 3 . 2 . 1 9 1 . k o r 6 2 1 0 1 8 6 5 . 7 8 5 7 1 2 3 1 5 8 . 0 9 5 1 8 3 1 9 8 . 3 4 4 7 4 4 2 4 0 6 . 1 8 1 2 6 1 9 9 0 4 9 . 9 7 6 4 7 1 2 0 3 2 6 . 4 3 1 3 1 9 9 2 5 1 . 5 7 5 5 4 5 1 5 2 2 . 1 5 2 9 6 0 1 0 2 0 3 3 . 3 2 5 2 1 2 9 7 2 6 . 6 7 8 3 1 9 7 9 6 3 . 1 2 6 3 4 4 8 4 5 8 . 2 8 9 5 5 9 1 0 7 7 5 2 . 3 8 6 7 1 3 5 6 3 9 . 8 1 4 1 2 0 4 2 6 6 . 4 8 8 6 4 1 9 1 9 3 . 9 6 0 5 5 8 1 0 4 9 0 7 . 6 4 6 1 1 4 0 3 5 7 . 6 9 4 2 0 2 0 8 1 . 6 7 0 9 4 1 5 4 5 6 . 1 1 1 4 5 7 1 1 0 2 9 6 . 7 9 0 1 1 3 5 9 4 7 . 1 3 3 8 2 0 3 6 7 7 . 4 8 6 1 3 9 3 3 3 0 . 6 4 3 2 5 6 1 0 9 6 4 1 . 0 4 0 4 1 3 6 1 7 1 . 5 7 9 9 2 0 2 2 8 7 . 9 7 5 2 3 8 7 6 1 8 . 5 6 3 8 5 5 1 1 0 3 8 4 . 8 1 6 9 1 3 8 2 1 7 . 3 1 6 2 1 9 5 1 9 8 . 0 4 1 5 3 6 8 8 5 9 . 9 4 5 4 1 1 2 8 1 2 . 6 3 1 4 1 3 8 5 3 1 . 9 7 2 5 1 9 6 1 8 6 . 1 3 1 3 6 9 8 3 8 . 6 0 3 5 1 1 0 5 7 1 . 1 1 9 1 3 3 0 1 5 . 7 2 3 9 1 9 0 5 7 3 . 5 9 5 6 3 6 7 6 1 9 . 4 6 8 5 5 2 1 1 1 1 6 3 . 1 2 8 8 1 3 3 2 6 8 . 3 5 5 9 1 9 1 7 5 1 . 4 2 9 8 3 6 6 6 5 7 . 8 7 5 8 1 0 6 3 9 3 . 1 2 1 1 3 1 7 3 3 . 0 6 4 6 1 9 0 5 6 5 . 9 7 7 6 3 6 6 5 7 2 . 8 3 5 2 5 0 1 0 6 7 7 0 . 0 1 5 9 1 3 2 2 2 3 . 9 0 8 6 1 8 7 2 6 2 . 1 6 9 2 3 6 1 0 6 9 . 4 1 8 2 4 9 1 1 0 5 9 7 . 2 2 7 8 1 3 2 9 3 7 . 4 6 1 9 1 9 1 7 9 1 . 0 5 3 6 3 5 8 8 0 8 . 1 6 8 3 1 0 8 3 7 8 . 1 3 7 1 3 7 3 5 5 . 3 2 4 4 1 8 6 8 5 7 . 7 0 9 7 3 6 9 7 2 3 . 5 3 6 4 4 7 1 0 7 8 5 2 . 2 0 3 2 1 3 5 8 8 9 . 9 7 2 9 1 8 3 4 3 6 . 5 2 9 9 3 4 3 2 0 1 . 4 2 2 3 1 1 4 4 2 5 . 4 5 9 1 3 4 2 0 8 . 1 2 2 3 1 8 4 7 9 1 . 2 1 4 5 3 7 1 1 5 6 . 2 7 5 6 4 5 1 1 1 7 7 9 . 6 9 5 3 1 3 5 8 6 6 . 4 6 1 1 1 8 0 3 6 6 . 4 2 3 3 6 1 8 6 1 . 3 4 7 4 4 1 1 1 2 2 0 . 0 7 1 9 1 3 4 6 8 3 . 0 4 1 5 1 8 7 3 0 5 . 4 4 2 9 3 5 5 6 6 0 . 5 3 9 4 4 3 1 1 8 0 6 3 . 4 8 9 7 1 3 2 1 8 3 . 9 9 5 2 1 7 8 9 4 0 . 6 1 4 9 3 5 7 3 0 3 . 1 5 6 2 4 2 1 1 1 5 0 4 . 3 6 0 6 1 3 8 7 8 4 . 9 5 0 2 1 9 2 3 1 9 . 8 0 8 4 3 6 3 5 7 0 . 2 4 7 3 4 1 1 1 0 6 9 7 . 1 5 0 5 1 3 2 6 8 3 . 0 5 1 1 9 2 2 1 1 . 5 6 2 5 3 6 9 0 9 9 . 5 3 7 7 4 0 1 1 3 7 1 1 . 2 6 7 6 1 3 3 1 2 2 . 9 1 2 8 1 9 2 5 0 9 . 1 1 5 5 3 9 7 1 0 7 . 6 0 3 5 3 9 1 1 5 2 2 9 . 7 6 2 7 1 3 4 8 8 0 . 7 7 5 3 1 9 1 2 7 6 . 7 8 5 8 3 9 2 7 8 5 . 3 8 2 1 1 1 1 9 0 8 . 6 9 4 1 3 4 1 8 7 . 4 5 9 8 1 9 0 9 1 3 . 9 4 8 8 4 0 3 4 5 3 . 4 5 7 3 3 7 1 1 6 0 1 1 . 5 9 8 1 1 3 3 1 4 3 . 3 0 4 1 1 8 5 6 5 3 . 0 7 1 8 3 8 7 1 8 6 . 4 2 6 3 6 1 1 0 5 0 7 . 1 0 3 2 1 3 2 6 6 9 . 6 7 5 8 1 9 2 3 1 5 . 7 8 6 1 3 8 4 9 6 7 . 7 9 6 8 3 5 1 1 4 4 9 7 . 1 4 7 1 1 3 3 4 9 2 . 8 0 8 5 1 9 0 0 0 3 . 8 1 7 1 3 7 9 4 7 1 . 0 8 4 7 3 4 1 1 3 7 8 2 . 7 5 1 3 6 2 0 8 . 1 9 3 1 8 6 5 8 9 . 3 3 7 5 3 6 7 3 9 2 . 7 9 9 2 3 3 1 1 2 1 9 6 . 5 0 2 8 1 3 4 1 0 6 . 2 8 3 8 1 8 8 9 6 6 . 2 3 6 7 3 5 5 2 7 7 . 1 2 8 2 3 2 1 1 2 1 9 0 . 4 8 5 7 1 3 0 5 9 7 . 3 4 8 1 1 8 2 6 3 9 . 6 5 2 4 3 3 6 3 7 4 . 0 2 5 9 3 1 1 0 7 3 7 2 . 2 3 8 7 1 3 0 6 0 0 . 3 3 3 1 1 8 4 7 0 7 . 0 2 9 4 3 2 3 3 3 7 . 8 0 6 9 3 0 1 1 2 0 8 2 . 7 1 4 3 1 2 7 4 1 5 . 3 2 2 3 1 8 2 7 7 5 . 9 0 4 8 2 9 9 8 2 5 . 8 9 2 4 2 9 1 0 9 7 7 5 . 3 6 0 1 1 2 5 1 3 6 . 6 1 9 3 1 7 9 2 8 0 . 0 6 9 2 9 1 7 4 3 . 5 9 1 4 2 8 1 0 9 3 6 6 . 5 8 2 6 1 2 4 9 1 0 . 9 8 6 1 1 7 4 8 4 1 . 0 2 2 5 2 6 8 5 5 2 . 8 8 4 4 2 7 1 0 9 5 7 7 . 9 5 8 5 1 2 2 4 6 2 . 3 4 9 2 1 7 0 1 7 6 . 8 5 0 9 2 4 5 7 2 9 . 8 4 1 2 6 1 0 8 8 1 0 . 0 8 3 6 1 2 1 8 1 7 . 9 3 9 1 5 9 3 8 4 . 9 9 0 3 2 2 8 2 8 0 . 8 2 6 1 2 5 1 1 3 4 6 5 . 1 4 5 1 1 1 6 7 0 6 . 6 1 3 5 1 5 7 4 1 7 . 0 3 6 6 2 1 3 6 8 5 . 3 5 9 5 2 4 1 0 6 1 1 2 . 1 9 7 3 1 1 4 8 7 2 . 8 9 6 5 1 4 9 2 3 5 . 8 9 2 1 2 0 3 1 5 3 . 9 1 7 2 2 3 1 0 5 7 4 1 . 2 7 6 1 1 1 3 9 9 0 . 4 4 8 1 3 6 2 2 9 . 8 7 8 5 1 7 5 0 6 5 . 8 5 6 1 2 2 1 0 4 7 8 6 . 9 7 5 5 1 0 9 3 9 6 . 4 0 8 6 1 2 6 1 8 1 . 4 3 0 8 1 6 8 9 9 1 . 9 2 3 1 2 1 1 0 0 0 3 3 . 5 2 8 2 1 0 8 5 3 4 . 3 0 4 1 1 2 0 2 0 2 . 1 1 9 3 1 4 5 4 6 2 . 2 3 0 8 2 0 1 0 3 5 8 5 . 6 0 1 5 1 0 2 6 0 2 . 2 0 5 1 1 1 0 4 8 9 . 1 4 4 4 . 1 0 2 4 0 1 . 5 3 7 1 0 7 2 1 6 . 4 6 1 5 1 1 1 4 4 0 . 8 8 1 . 1 8 9 7 0 1 9 . 8 3 3 3 3 1 1 2 4 8 8 9 9 4 5 3 . 3 3 3 3 3 . a l t i s k o l a s z a k i s k o l a e r e t t s e g i d i p l o m a

Net monthly earnings by age and educational attainment, Hungary, 2009. HUF.

Source: Based on data of Hungarian Wage-Tariff Survey, 2009.

N=192 764

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9

4 5 . 6 2 1 0 1 8 6 5 . 7 8 5 7 1 2 3 1 5 8 . 0 9 5 1 8 3 1 9 8 . 3 4 4 7 4 4 2 4 0 6 . 1 8 1 2 4 4 . 6 1 9 9 0 4 9 . 9 7 6 4 7 1 2 0 3 2 6 . 4 3 1 3 1 9 9 2 5 1 . 5 7 5 5 4 5 1 5 2 2 . 1 5 2 9 4 3 . 6 0 1 0 2 0 3 3 . 3 2 5 2 1 2 9 7 2 6 . 6 7 8 3 1 9 7 9 6 3 . 1 2 6 3 4 4 8 4 5 8 . 2 8 9 5 4 2 . 5 9 1 0 7 7 5 2 . 3 8 6 7 1 3 5 6 3 9 . 8 1 4 1 2 0 4 2 6 6 . 4 8 8 6 4 1 9 1 9 3 . 9 6 0 5 4 1 . 5 8 1 0 4 9 0 7 . 6 4 6 1 1 4 0 3 5 7 . 6 9 4 2 0 2 0 8 1 . 6 7 0 9 4 1 5 4 5 6 . 1 1 1 4 4 0 . 5 7 1 1 0 2 9 6 . 7 9 0 1 1 3 5 9 4 7 . 1 3 3 8 2 0 3 6 7 7 . 4 8 6 1 3 9 3 3 3 0 . 6 4 3 2 3 9 . 5 6 1 0 9 6 4 1 . 0 4 0 4 1 3 6 1 7 1 . 5 7 9 9 2 0 2 2 8 7 . 9 7 5 2 3 8 7 6 1 8 . 5 6 3 8 3 8 . 5 5 1 1 0 3 8 4 . 8 1 6 9 1 3 8 2 1 7 . 3 1 6 2 1 9 5 1 9 8 . 0 4 1 5 3 6 8 8 5 9 . 9 4 3 7 . 5 4 1 1 2 8 1 2 . 6 3 1 4 1 3 8 5 3 1 . 9 7 2 5 1 9 6 1 8 6 . 1 3 1 3 6 9 8 3 8 . 6 0 3 5 3 6 . 5 3 1 1 0 5 7 1 . 1 1 9 1 3 3 0 1 5 . 7 2 3 9 1 9 0 5 7 3 . 5 9 5 6 3 6 7 6 1 9 . 4 6 8 5 3 5 . 5 2 1 1 1 1 6 3 . 1 2 8 8 1 3 3 2 6 8 . 3 5 5 9 1 9 1 7 5 1 . 4 2 9 8 3 6 6 6 5 7 . 8 7 5 8 3 4 . 5 1 1 0 6 3 9 3 . 1 2 1 1 3 1 7 3 3 . 0 6 4 6 1 9 0 5 6 5 . 9 7 7 6 3 6 6 5 7 2 . 8 3 5 2 3 3 . 5 0 1 0 6 7 7 0 . 0 1 5 9 1 3 2 2 2 3 . 9 0 8 6 1 8 7 2 6 2 . 1 6 9 2 3 6 1 0 6 9 . 4 1 8 2 3 2 . 4 9 1 1 0 5 9 7 . 2 2 7 8 1 3 2 9 3 7 . 4 6 1 9 1 9 1 7 9 1 . 0 5 3 6 3 5 8 8 0 8 . 1 6 8 3 3 1 . 4 8 1 0 8 3 7 8 . 1 3 7 1 3 7 3 5 5 . 3 2 4 4 1 8 6 8 5 7 . 7 0 9 7 3 6 9 7 2 3 . 5 3 6 4 3 0 . 4 7 1 0 7 8 5 2 . 2 0 3 2 1 3 5 8 8 9 . 9 7 2 9 1 8 3 4 3 6 . 5 2 9 9 3 4 3 2 0 1 . 4 2 2 3 2 9 . 4 6 1 1 4 4 2 5 . 4 5 9 1 3 4 2 0 8 . 1 2 2 3 1 8 4 7 9 1 . 2 1 4 5 3 7 1 1 5 6 . 2 7 5 6 2 8 . 4 5 1 1 1 7 7 9 . 6 9 5 3 1 3 5 8 6 6 . 4 6 1 1 1 8 0 3 6 6 . 4 2 3 3 6 1 8 6 1 . 3 4 7 2 7 . 4 4 1 1 1 2 2 0 . 0 7 1 9 1 3 4 6 8 3 . 0 4 1 5 1 8 7 3 0 5 . 4 4 2 9 3 5 5 6 6 0 . 5 3 9 4 2 6 . 4 3 1 1 8 0 6 3 . 4 8 9 7 1 3 2 1 8 3 . 9 9 5 2 1 7 8 9 4 0 . 6 1 4 9 3 5 7 3 0 3 . 1 5 6 2 2 5 . 4 2 1 1 1 5 0 4 . 3 6 0 6 1 3 8 7 8 4 . 9 5 0 2 1 9 2 3 1 9 . 8 0 8 4 3 6 3 5 7 0 . 2 4 7 3 2 4 . 4 1 1 1 0 6 9 7 . 1 5 0 5 1 3 2 6 8 3 . 0 5 1 1 9 2 2 1 1 . 5 6 2 5 3 6 9 0 9 9 . 5 3 7 7 2 3 . 4 0 1 1 3 7 1 1 . 2 6 7 6 1 3 3 1 2 2 . 9 1 2 8 1 9 2 5 0 9 . 1 1 5 5 3 9 7 1 0 7 . 6 0 3 5 2 2 . 3 9 1 1 5 2 2 9 . 7 6 2 7 1 3 4 8 8 0 . 7 7 5 3 1 9 1 2 7 6 . 7 8 5 8 3 9 2 7 8 5 . 3 8 2 1 2 1 . 3 8 1 1 1 9 0 8 . 6 9 4 1 3 4 1 8 7 . 4 5 9 8 1 9 0 9 1 3 . 9 4 8 8 4 0 3 4 5 3 . 4 5 7 3 2 0 . 3 7 1 1 6 0 1 1 . 5 9 8 1 1 3 3 1 4 3 . 3 0 4 1 1 8 5 6 5 3 . 0 7 1 8 3 8 7 1 8 6 . 4 2 6 1 9 . 3 6 1 1 0 5 0 7 . 1 0 3 2 1 3 2 6 6 9 . 6 7 5 8 1 9 2 3 1 5 . 7 8 6 1 3 8 4 9 6 7 . 7 9 6 8 1 8 . 3 5 1 1 4 4 9 7 . 1 4 7 1 1 3 3 4 9 2 . 8 0 8 5 1 9 0 0 0 3 . 8 1 7 1 3 7 9 4 7 1 . 0 8 4 7 1 7 . 3 4 1 1 3 7 8 2 . 7 5 1 3 6 2 0 8 . 1 9 3 1 8 6 5 8 9 . 3 3 7 5 3 6 7 3 9 2 . 7 9 9 2 1 6 . 3 3 1 1 2 1 9 6 . 5 0 2 8 1 3 4 1 0 6 . 2 8 3 8 1 8 8 9 6 6 . 2 3 6 7 3 5 5 2 7 7 . 1 2 8 2 1 5 . 3 2 1 1 2 1 9 0 . 4 8 5 7 1 3 0 5 9 7 . 3 4 8 1 1 8 2 6 3 9 . 6 5 2 4 3 3 6 3 7 4 . 0 2 5 9 1 4 . 3 1 1 0 7 3 7 2 . 2 3 8 7 1 3 0 6 0 0 . 3 3 3 1 1 8 4 7 0 7 . 0 2 9 4 3 2 3 3 3 7 . 8 0 6 9 1 3 . 3 0 1 1 2 0 8 2 . 7 1 4 3 1 2 7 4 1 5 . 3 2 2 3 1 8 2 7 7 5 . 9 0 4 8 2 9 9 8 2 5 . 8 9 2 4 1 2 . 2 9 1 0 9 7 7 5 . 3 6 0 1 1 2 5 1 3 6 . 6 1 9 3 1 7 9 2 8 0 . 0 6 9 2 9 1 7 4 3 . 5 9 1 4 1 1 . 2 8 1 0 9 3 6 6 . 5 8 2 6 1 2 4 9 1 0 . 9 8 6 1 1 7 4 8 4 1 . 0 2 2 5 2 6 8 5 5 2 . 8 8 4 4 1 0 . 2 7 1 0 9 5 7 7 . 9 5 8 5 1 2 2 4 6 2 . 3 4 9 2 1 7 0 1 7 6 . 8 5 0 9 2 4 5 7 2 9 . 8 4 1 9 . 2 6 1 0 8 8 1 0 . 0 8 3 6 1 2 1 8 1 7 . 9 3 9 1 5 9 3 8 4 . 9 9 0 3 2 2 8 2 8 0 . 8 2 6 1 8 . 2 5 1 1 3 4 6 5 . 1 4 5 1 1 1 6 7 0 6 . 6 1 3 5 1 5 7 4 1 7 . 0 3 6 6 2 1 3 6 8 5 . 3 5 9 5 7 . 2 4 1 0 6 1 1 2 . 1 9 7 3 1 1 4 8 7 2 . 8 9 6 5 1 4 9 2 3 5 . 8 9 2 1 2 0 3 1 5 3 . 9 1 7 2 6 . 2 3 1 0 5 7 4 1 . 2 7 6 1 1 1 3 9 9 0 . 4 4 8 1 3 6 2 2 9 . 8 7 8 5 1 7 5 0 6 5 . 8 5 6 1 5 . 2 2 1 0 4 7 8 6 . 9 7 5 5 1 0 9 3 9 6 . 4 0 8 6 1 2 6 1 8 1 . 4 3 0 8 1 6 8 9 9 1 . 9 2 3 1 4 . 2 1 1 0 0 0 3 3 . 5 2 8 2 1 0 8 5 3 4 . 3 0 4 1 1 2 0 2 0 2 . 1 1 9 3 1 4 5 4 6 2 . 2 3 0 8 3 . 2 0 1 0 3 5 8 5 . 6 0 1 5 1 0 2 6 0 2 . 2 0 5 1 1 1 0 4 8 9 . 1 4 4 4 . 2 . 1 9 1 0 2 4 0 1 . 5 3 7 1 0 7 2 1 6 . 4 6 1 5 1 1 1 4 4 0 . 8 8 1 . 1 . 1 8 9 7 0 1 9 . 8 3 3 3 3 1 1 2 4 8 8 9 9 4 5 3 . 3 3 3 3 3 . k o r a l t i s k o l a s z a k i s k o l a e r e t t s e g i d i p l o m a

ex ante

Assumption: constant age-

education- relationship over

time

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10 Life-cycle (cohort) data

Annual versus hourly earnings

- education affects both productivity (hourly wage) and increase in employability (number of working hours)

- number of hours worked is individual’s choice between leisure and income - education affects individuals’ choice in favor of work

ex post

- lack of data

- necessary to adjust data for changes in price level (the longer the period, the less reliable is the adjustment) - highly affected by fluctuations

in the business cycle, by crises – significant potential error

Year W h-1 W h

1967 1500 0

1968 1520 0

1969 1540 0

1970 1700 0

1971 1720 2200

... ... ...

2011 183200 442406

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11 Adjustments

Adjustment of age earnings profiles with:

- anticipated real growth in earnings (g) - unemployment (u)

- mortality (m)

Ŵ ^ht = W ^ht (1+g)(1- m ^ht ) (1-u ^ht )

Measurement problems 2

• Social benefits assumption: observed wages are a good proxy for the marginal product of labor, the difference in average wage between two education levels measures the difference in marginal productivity, i.e. the marginal product of the additional education

MP = W? (public sector wages?)

• External benefits are ignored

Lifetime income differentials are attributed to education

Is a portion (or all) of the differentials are due to differences in ability, motivation, socioeconomic and other factors which correlate with years of schooling completed?

- ability bias

(to be discussed next week)

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12 Rates of return to human capital and business

capital in 16 countries 1995

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13 Returns to investment in education by level of education, by regions 2002 Full method

Social % Private %

Region Primary Secondary Higher Alsó fok Középfok Felsőfok

Asia 16.2 11.1 11.0 20.0 15.8 18.2

Eurppe/middle East/North Africa

15.6 9.7 9.9 13.8 13.6 18.8

Latin

America/Caribbean

17.4 12.9 12.3 26.6 17-0 19.5

OECD 8.5 9.4 8.5 13.4 11.3 11.6

Sub-Saharan Africa

25.4 18.4 11.3 37.6 24.6 27.8

Source: G. Psacharoupolos -H.A. Patrinos: Returns to Investment in Education. A Further update. World Bank

Policy Research Working Papers 2002.

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14 Private internal rates of return - university level degree 2004

2. Net present value analysis

Decision criteria: select all projects where the present value of benefits exceeds the present value of costs NCV>0

Source: Education at a Glance 2008: OECD Indicators

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i W NCV W

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15 2. Net present value analysis –the choice of discount rate

The decision on two mutually exclusive education investments. To learn

medicine or economics?

Decision based on rate of return analysis:

choose economics r 2 > r 1

Decision based on net present value analysis: the choice would vary with changes in discount rate

if i < i* choose medicine,

if discount rate > i* choose economics

ECONOMICS OF EDUCATION