Education and Poverty

Social World I

Observations

• Strong consensus, education as important determinant of individual earnings; economic growth

• Exists controversy around policy issues– Resources vs. outcomes– Appropriate incentive structure to improve

educational outcomes

• Links: Education and– Health care– Homelessness– Hunger– Jobs

• Common link: poverty

Links, Education and Poverty

• Individual level– Years of education vs. poverty rate– Recessions; job stability– Frequency, duration of unemployment

• Aggregate level: What do poor countries lack?– Ideas– Incentives to use ideas in transforming

resources from low to high-valued uses– That is: an environment for encouraging

• Innovation

• Scientific discovery

– Also note:• How to improve? Invest in basic

– Literacy

– Numeracy

– Result:• Increases in “size of pie”

• More resources to reduce hunger, homelessness; improve health care

• Less spending, crime; public assistance

• Argument for– Specific education/training– General education/training

• Social, political framework appropriate for modern economic development

Human Capital Theory

• Skills, knowledge, abilities of people

• How acquired?– Quantity of schooling– Quality of schooling– On-the-job training/experience– Family– Ability– Continuing education

• Result: – education---> productivity---> earnings

• But note: productivity also affected by other factors– Quantity of capital per worker– Organization of work

The Human Capital Decision

• Compare expected– Marginal benefits (most in future)

• Higher wages, linked to more years of education

• Rate of return on education? 5-15% per year

• Recent increase in skill premium

– Marginal costs• Direct spending

• Opportunity cost of time

Human Capital Theory and Public Policy Toward Poverty

• Implication: Public investment in human capital formation would reduce poverty

• Education the centerpiece of War on Poverty

• Why necessary? Tendency for individuals to underinvest in education– Pay costs, not capture full benefits– Difficult in borrowing: problem of collateral

Does It Work?

• What about the really poor: any difficulties in increasing quantity, quality of education?– Individuals at lowest income levels often least

well-served by schools– Resulting disadvantage in competing for jobs– Demand for education as depending on

expected return vs. opportunity cost

– Application to• Young, single mothers

• Young, urban, non-white males

– Does compensatory education work?– Does education eliminate

• Low-paying jobs?

• Economic dislocations?

• Macroeconomic failures?

• Is more spending on education the answer?– Ambiguity regarding relationship between

spending, student performance (test scores): negative relationship???

– What seems to affect student achievement?• Schools

• Student ability, motivation

• Family educational background

• Peers

• Community

• Possible reforms?– More attention to

• Incentives

• Governance

• Management

– Strict accountability, principals, teachers• Clarify goals (measurability issues)

• Hold schools accountable for student success or failure in reaching goals

• Align incentive structures with goals

• Examples: Chicago; Dallas Morning News, 11-15-98; Austin

• May require much experimentation with alternatives

– Interesting current choice:• Continue to increase quantity? “14 years of

education for all”

• Increase quality of– Primary

– Secondary

Other Critiques

• Education as “Screening Mechanism”– Education as recognizing, rather than creating

occupational skills– Schools identify people with natural ability for

employers– That is: educational attainment signals

(provides reliable information about) relative productivity of individual workers

• Does it matter which hypothesis we believe? Different implications for public policy– Social rate of return may be zero under

signaling hypothesis => government subsidies to increase human capital as socially wasteful

– Even though private rate of return may be positive

• Is education productive? – Provides a (socially useful) sorting mechanism:

gets people in the right jobs– Does seem to increase human capital

• Marxist critique: Education as– Promoting social control– Socializing the poor into accepting the

legitimacy of the existing order– Not educate the poor for upward mobility

Does Education Reduce Poverty?

• Long-run perspective: Changes the numbers of the poor

• Short-run perspective: Changes who is poor– Schooling, work experience seem to account

for about half of earnings variation

– 1980s data; and • Increases in real wages, 16+ years of education

• Decreases in real wages, < 12 years of education

– Education/skill premium, and widening income disparities

– Policy implication:• Education important; but also look at

• Barriers to skill acquisition

• Ways to increase attachment to labor markets

In The End . . .

• Poverty, income differences due in part to differences in education

• Due also in part to differences in– Ability– Effort– Luck– Inheritance

– Discrimination– Willingness to take risks– Past savings

• Education as a necessary but not sufficient condition for reducing poverty

• Leave with:– How much to spend on education vs. other

public policy initiatives to reduce poverty?– Where should the dollars to education go?