Human Capital Theory and Benefit-Cost Analysis in Education Emmanuel Jimenez, decrg

Human Capital Theory and Benefit-Cost Analysis in Education

• Emmanuel Jimenez, DECRG,

• and Peter Moock, EASED

Outline

• Basic Framework for Analyzing Investments in Human Capital

• Relevance for project analysis...not

• Issues
• Modifying the approach

Human Capital Scale -- Weighing Private Benefits and Costs

• Benefits Costs

The productivity chain

• Education Human capital Productivity

• Wages Welfare

The productivity chain

• Education Human capital Productivity

• Wages Welfare

Human Capital and Productivity

• Human Capital

• Working with Existing Developing

• Technology Better New Technology

• Acquiring Processing

• New Information

• Knowledge

Education raises wages for both men and women:

Returns over time

Education raises wages for both men and women:

Education and productivity

• Better educated farmers get a higher return on their investments in agriculture:

• In Africa, farmers who have completed 4 years of education (the minimum necessary for literacy) produce, on average about 8-10 percent more than farmers who had not gone to school (Moock, Jamison et al., Jamison & Moock)
• Technical and allocative efficiency (Welch, Timmer)

Education and productivity (cont’d)

• Production function may matter:

• In simple tasks or in settings where technology slow to change, effect of education small
• In traditional farming, techniques passed from generation to generation (T.W. Schultz)
• In piece-rate work in the Philippines, wage not related to schooling after controlling for gender and physical stature (Foster and Rosenzweig)

Human Capital and Wages

• Education Human capital Productivity

• Wages Welfare

Education and productivity (cont’d)

• But, if task involves new technology whether there is a premium on learning and information acquisition learning may be very important
• For example, large effect of education in Kenya after introduction of new hybrid seed varieties (Moock)
• In India, areas with relatively few educated farmers at the onset of the green revolution experienced less growth compared to other, high schooling areas (Foster and Rosenzweig)

Human Capital Scale -- Weighing Private Benefits and Costs

• Benefits Costs

• Increased market productivity

• Private non-market effects

• (e.g., better personal

• health, household productivity

• effects)

Human Capital Scale -- Weighing Private Benefits and Costs

• Benefits Costs

• Increased market productivity Direct costs

• Private non-market effects Foregone

• production or
• earnings

Graph on Rate of Return Estimation for University-level Education

Graph on Rate of Return Estimation for University-level Education

Graph on Rate of Return Estimation for University-level Education

Graph on Rate of Return Estimation for University-level Education

Human Capital Scale -- Weighing Private Benefits and Costs

• Benefits Costs

Graph on Rate of Return Estimation for University-level Education

Time Value of Money

• Now Later

Discounting

• Now Later

Interest Rate (Discount Rate)

Interest Rate (Discount Rate)

Weighing Private Benefits and Costs -- Without Discounting

Internal Rate of Return

• Benefits Costs

Returns to Investment in Education by Level (%) -- Private Rates of Return

• Private
• Country/Yr. Prim. Sec. Higher

• Bolivia 1989 9.8 8.1 16.4

• Brazil 1989 36.6 5.1 28.2

• Greece 1977 20.0 6.0 5.5

• Israel 1958 27.0 6.9 8.0

• Japan 1976 13.4 10.4 8.8

• Mexico 1984 21.6 15.1 21.7

• Paraguay 1990 23.7 14.6 13.7

• Taiwan 1972 50.0 12.7 15.8

• Venezuela 1989 36.3 14.6 11.0

• Source: Psacharopoulos (1994).

Social Benefits

Marginal Gains in Per Capita GDP Growth per 10% Increase in Enrollment Rate, 1960-1985

Child mortality and education

Fertility and education

Human Capital Scale -- Weighing Private Benefits and Costs

• Benefits Costs

• Increase market productivity Direct costs

• Private non-market effects Foregone production or

• earnings

• Spillover effects Public subsidy

• Technical innovation

• Community non-market effects

• Reduced fertility/child mortality

Measurement

• Can we measure externalities?

• Can we measure monetary value of reduced fertility and reduced mortality?

• Can we measure returns to equality?

Full (“Social”) Rates of Return

• Benefits Costs

• Increased market productivity Out-of-pocket expenses

• Private non-market effects Foregone production/

• earnings

• Taxes on higher earnings Public subsidy

Estimated Full Rates of Return by Level of Education and Country Group (%)

• Low-income Middle-income High-income

• group group group

• Level of education (74 countries) (19 countries) (20 countries)

• Primary 47 39 --

• Secondary 8 52 < 0

• Higher < 0 < 0 20

Studies of rates of return to sector investment

• Relevant to the economic analysis of projects?

Relevant to economic analysis of projects?

• externalities

• marginal returns vs. average returns

• projects more delimited

Using economic sector work to diagnose sector issues and design appropriate interventions

Cote d’Ivoire: Distribution of Education Subsidies

Ratio of Private to Public Spending

• Nicaragua

• Primary 1.25

• Secondary 2.57

• Kenya

• Primary 2.22

• Secondary 0.62

Some of the right questions

• What is the full cost of the project?
• What are the alternatives to the project?
• What are the benefits -- to the project?
• More students -- what will be the impact of the project on their future productivity?
• More efficient education system -- what are the cost savings?

More of the right questions

• What is the appropriate role of government?
• Try and estimate externalities
• How large would externalities have to be?
• What are the incentives (and the disincentives) to reform?
• Who benefits from the intervention?
• Who loses?

Human Capital Theory and Benefit-Cost Analysis in Education