Economics of Education.

AuthorHoxby, Caroline
PositionProgram Report

The enterprise of education has a supply side, where institutions produce education, and an investment side, where people acquire education. I say an "investment side" and not a "demand side" because education is largely an investment and not a form of consumption. Because it is an investment, the economics of education is guided by a great deal of theory that would not apply if education were a consumption good like, say, bread. Education economists study both the supply of and investment in education.

On the supply side, we think about institutions' objectives and constraints. We consider competition among institutions and how institutions interact with governments and taxpayers. We use models from public economics, political economy, industrial organization, regulation, and finance.

On the investment side, we consider whether people are under-or over-investing in their own or others' education--a determination primarily based on whether they are earning a higher or lower rate of return than what they could earn in an alternative investment, such as physical capital. We consider market failures because the financing of human capital investments is failure-prone, owing to issues like moral hazard that occur when human beings themselves are the vehicles for investment. We often investigate the potential for market failures due to people being poorly informed or irrational about investing in themselves--mispredicting their returns, say, or discounting the future in a hyperbolic manner.

Applying economic analysis to education is the defining feature of the NBER's Economics of Education Program. As an NBER program, there are also some distinctive features. First, the research carried out by education economists now relies, to an unusual extent, on extremely high-quality administrative data recorded by schools, governments, and authoritative third parties. The data are so accurate and comprehensive that we often can use ambitious econometric tools that are impractical with data that are sample-based, sparse, or prone to error. Second, the program features young scholars to an unusual extent, because in most years the share of education economists in the cohort of new PhDs is greater than the share in the previous year. These emerging scholars are highly productive, and they keep the program in a constant state of rejuvenation and intellectual excitement. Third, the program is unusually diverse and inclusive because education is so interesting to so many scholars. The participants in program meetings represent a wide array of institutions, demographic backgrounds, national origins, and policy views.

This energy and diversity make writing a report like this one a challenge: I cannot possibly do justice to all of the research. So, in this report, I emphasize a few key topics that have received considerable attention in the past few years. In my conclusion, I discuss some up-and-coming topics as well.

Productivity in Higher Education

Our most important project, since my last report, is our initiative to analyze productivity in higher education. Institutions of higher education--from large elite research universities to small private colleges and for-profit institutions--have never been under greater scrutiny. Policymakers, families, philanthropists, and the media question whether the benefits of higher education justify the costs. These questions are fundamentally about the productivity of the sector.

To answer these questions, the NBER, with support from the Alfred P. Sloan Foundation and the Spencer Foundation, commissioned nine papers to be the focus of a conference that brought together researchers, university leaders, policymakers, and journalists. The papers are available as NBER working papers and as chapters in a forthcoming volume, Productivity in Higher Education. The studies use rich and novel administrative data, employ cogent economic reasoning, deploy the latest econometric methods, and evince deep institutional understanding. In combination, the papers are fairly comprehensive: They include studies of the returns to undergraduate education, how costs differ by major, the productivity of for-profit schools, the productivity of various types of instructors, and how online education has affected the market.

Analyses of productivity in higher education must confront significant challenges. Higher education affects many outcomes: students' skills, employment, innovativeness, and public service, to name a few. Higher education institutions conduct a bewildering array of activities across many domains, from undergraduate teaching to medical research. Even if we focus on a single outcome--the earnings-based returns to undergraduate education, for instance--assessing the contribution of an individual institution must overcome the fact that students select into schools based on their aptitude and often attend more than one school. Finally, some benefits of higher education are inherently public in nature and difficult to measure or attribute to any one institution. This project's studies demonstrate that these five challenges--multiple outcomes, the multi-product nature of institutions, selection, attribution, and public benefits--are surmountable.

For example, I attempt to compute the productivity of the vast majority of undergraduate programs (more than 6,000) in the United States. (1) While the study emphasizes productivity results based on lifetime earnings because these matter disproportionately for the financial stability of the postsecondary sector, it also shows results based on public service and innovation. The study's most important advance, however, is addressing the aforementioned...

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