Economics of Education

Economists analyse the production of education in this world where resources such as the capital invested in buildings or technology and the labour of the teacher workforce are necessarily scarce. This scarcity of resources means that policymakers must decide:

  1. How much to spend on each stage of education (i.e. what to produce);
  2. How to provide educational services in a way that maximises its benefits to society (i.e. how to produce education); and
  3. Who should have access to each stage of education (i.e. for whom is education provided).

Economic theory is able to help policy makers by providing both facts about the education system and values to inform decision-making. The part of economics that is concerned with establishing facts about the world is called positive economics. It asks questions such as ‘can we improve the quality of teachers by increasing pay’ or ‘will smaller class sizes raise pupil attainment’? Normative economics asks questions that require value judgments such as ‘is it fair to charge higher education students tuition fees’?

A social welfare framework underpins the dominant approach in the economics of education. According to this framework, society should strive to arrange educational services to be produced and distributed in manner that is both efficient and equitable. Efficiency means that educational outputs are maximised, given a set of constrained resources. Equity means that services are distributed according to some principle of social justice or fairness.

Individuals and governments often face hard choices because of the scarce resources they possess. For example, expanding higher education and increasing provision of early years care might both appear to be policies that have the potential to improve the well-being of society overall, but which should a government prioritise? Economists describe the costs of taking a particular action as opportunity costs, because the greatest cost of expanding higher education might be the lost benefits of not undertaking the next best alternative policy, such as increased provision of early years care.

Short history of the economics of education

Economists are normally associated with ensuring that profit-making companies and the overall economy functions well, but they have slowly expanded their interests to new spheres of society. The origin of the economics of education as a significant field within economics dates back to the theoretical and empirical developments made by American economists such as Gary Becker and Jacob Mincer in the 1960s. Their work introduced the idea of education as human capital and they attempted to calculate the economic returns to acquiring education.

Over the past decade there has been an enormous growth of interest by economists in education policy, both in the UK and across the world. This has been accompanied by a growing political interest in market-based reforms across the public sector. These types of reforms include devolvement of financial planning to front-line institutions such as hospitals and schools and giving consumers of public services choice about which provider to use. Economists from other fields such as labour economics have been attracted by the growing availability of large-scale datasets that facilitate complex statistical analysis to analyse the impact of particular policy initiatives. Examples of these data include the National Pupil Database in England, which has collected annual information on the background characteristics and Key Stage attainment data of all pupils in state-maintained schools since 2002, and the PISA, an international survey of the skills of 15 year olds across many industrialised countries.

What is the economic paradigm?

Economic theory makes certain assumptions about human behaviour in order to make predictions about the effects of policy changes. The starting point of economic analysis is that individuals and institutions are rational agents (often given the name homo-economicus), operating with self-interested intent as they make decisions about providing or participating in education. Individuals are assumed to set themselves a goal of maximising their own well-being (or utility), given fixed preferences or tastes for education and a well-defined money constraint. Many economic theories assume that human brains possess perfect computational powers to process all the information needed to make optimal choices at all times!

These economic models of individuals and institutions present a simplified version of reality and for this reason they have been criticised by many sociologists and psychologists who claim they bear little resemblance to the real world. However, economists would argue that these simplifying assumptions are necessary to make precise predictions about the likely impact of policies in this complex world we live in. To put it another way, economists do not really believe that humans are so selfish and simple in their motivations; they just believe that this simplification is a useful analytical tool to help us understand the world better.

Books where you can learn more…

Checchi, Daniele (2008) The Economics of Education: Human Capital, Family Background and Inequality,  Cambridge: Cambridge University Press. [This book provides a comprehensive overview of most of the work currently being carried out in the field]

Le Grand, J., Propper, C. and Smith, S. (2008) The Economics of Social Problems, London: Palgrave Macmillan. [An introduction to economic theory applied to a wide variety of social problems, including education]

Machin, S. and Vignoles, A. (2005) What’s the Good of Education? Princeton: Princeton University Press. [A non-technical UK perspective on the economics of education]

Barr, N. (2004) Economics of the Welfare State, Oxford: Oxford University Press. [If you have studied a little economics before, this book gives an excellent overview of relevant economic theory]

If you can get access to academic journal articles, you might find this an interesting starting point:  Machin, S. (2008) The new economics of education: methods, evidence and policy, Journal of Population Economics, 21 pp 1-19.

Where to find relevant journal articles…

Articles by economists about education policy are published in specialist journals such as:

They also publish in other economic journals, such as:

Other articles can be found across geography, statistics and education journals, such as:

Where to find discussion papers…

IDEAS at RePEc.  Almost all economics of education journal articles are first made available as working papers here.

Institute for the Study of Labor.  The German think-tank IZA publishes many papers in the field of economics of education.

Centre for Market and Public Organisation, University of Bristol.  This is one of the the largest centres for research in economics of education in the UK.

Centre for Economics of Education.  CEE is a multi-institutional research centre based at the Centre for Economic Performance (LSE), IFS and IOE.

Institute for Fiscal Studies.  IFS publishes reports about education spending in the UK.

National Bureau of Economic Research.  NBER publishes many US working papers in the field of economics of education.  However, you need a subscription to download the actual papers.

National Center for the Study of Privatization in Education.  NCSPE is based at Teachers College, University of Colombia.