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



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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



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



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