Economic Impact of Education: Micro and Macro Studies, Study notes of Development Economics

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Lecture 5: EducationLecture

5: Education

Readings: „

Todaro, chapter 8

„

Roland, chapter 17

Introduction „ Education for all = a key inclusive economic institution ‰ Levels the playing field ‰ People can develop ideas, start businesses „ A key source of creative destruction ‰ People can acquire political power „ Might be blocked by extractive political institutions (elite) „ Might explain the “educational gap” g p g p

Educational gap: secondary school

Today: 2 questions 1 Is education that important? 1

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Is education that important? ‰ The returns to education 2 If it is important then how to increase it?

If it is important, then how to increase it?

Theoretical impact of education „ Human capital theory „ Human capital theory ‰ Seems obvious that there are private returns toeducation ‰ Although it depends on the quality of education...

Signaling theory of education (Spence,1973) „ Schooling is a signal, not a way to acquire valuable skills „ Problem of information asymmetry between employer and jobcandidate: ‰ During the interview, the employer does not know the candidate’s productivity(only CV with age, gender, education , experience...) ‰ The employer hires the candidate (a bit of a lottery) ‰ The worker reveals its productivity ‰ At time t+1 the employer hires or not based on the same CV: statistical ‰ At time t+1, the employer hires or not based on the same CV: statisticaldiscrimination ( ≠ taste-based discrimination) ‰ For a candidate, certain characteristics cannot be changed, but education can be. ‰ Students choose to study or not if the costs to acquire this signal are less than thewage then earned. ‰ According to this theory, schooling is only a signal .

Empirical impact of education: microstudies „

Lots of micro studies (Krueger et al., 2001)

g

„

Estimate (for a bunch of individuals i): ‰

Log(Wage i^ )= a + b * School i^

• c *Experience i^
• d * Experience i 2

Results „ Log(Wage i^ )= a + b * School i^

• c *Experience i^
• d * Experience i 2 „ All studies find a b between 0.05, and 0.15, so: ‰ 1 more year of education brings between 5% and 15% moresalary y

Returns to schooling „

Psacharopoulos

„

Psacharopoulos

Returns to schooling „

Psacharopoulos

„

Psacharopoulos

Omitted variables bias

Education

Wage

Omitted Variable bias:Ability,...

Solutions? „ Control for other factors (but what is ability?) „ Control for other factors (but what is ability?) „ Use twins (to control for unobserved familycharacteristics)characteristics) ‰ But why did one study more than the other? „ Use randomized experiments „ Use randomized experiments... „ Use natural experiments: D fl (1998) h l t ti i I d i ‰ D uflo (1998): school construction in Indonesia

Building schools „

Indonesia: oil revenues: build 61,000 schools in 1973

‰ Schools built in priority where there are few schools to start with ‰ So 2 levels of program: High and Low

P i

h

l

t d

t

b t

d 12

ld

„

P

rimary schools: students between 7 and 12 years old

‰ Students aged 2 to 6 in 1974: full exposure ‰ Students aged 12 to 17 in 1974: no exposure ‰ Students aged 18 to 24 in 1974: no exposure

Results