Main driving forces of education expenditures

Torberg FalchDepartment of Economics

Norwegian University of Science and TechnologyTrondheim, Norway

Overview of the presentation

• Identifying determinants of

- Expenditures in compulsory education

- Enrolment in tertiary education

- Public expenditures in tertiary education

• Potential school reforms in the future with implications for public sector expenditures

Expenditures in compulsory education: Theory

• Public sector decision-making

- Median voter model

- Bargaining within multi-party legislatures and with interest groups (trade unions)

- Common pool problem

- Fiscal illusion and the flypaper effect

- Behaviour of schools and their cost function

Expenditures in compulsory education: Empirical evidence

• Increased number of students increases expenditures (USA; Hoxby, 1996, Poterba, 1997, Harris et al., 2001; UK: Jackman and Papadachi, 1981, Johnes, 1993, Taylor and Bradley, 2000; Denmark: Heinesen, 2004; Norway: Borge and Rattsø, 1995, Falch and Rattsø, 1996, 1997, 1999a)

• The effect of the number of students is inelastic; the elasticity seems to be in the range 0.6 – 1.0.

• Increased income increases expenditures; education is a normal good (USA; Feldstein, 1975, Inman, 1979, Craig and Inman, 1982, Romer et al. 1992, Hoxby, 1996, Miller, 1996, Unnever et al., 2000, Harris et al., 2001; UK: Jackman and Papadachi, 1981; Denmark: Heinesen, 2004; Norway: Borge and Rattsø, 1995, Falch and Rattsø 1996, 1997, 1999a; Cross-country: Schultz, 1987, 1988)

• In cross-section studies the income elasticity is in the range 0.3 – 0.7

• In time series studies and cross-country studies the income elasticity is in the range 1- 2

• Other relevant factors (USA: Romer et al., 1992, Hoxby, 1996, Poterba, 1997, Flyer and Rosen, 1997, Miller, 1996, Harris et al., 2001; UK: Taylor and Bradley, 2000; Denmark: Heinesen, 2001; Norway: Borge and Rattsø, 1995, Falch and Rattsø, 1996, 1997, 1999a, Bonesrønning et al., 2004)

- Share of disadvantaged students (+)

- Tax price (-)

- Share of elderly in the population (-)

- Teacher unions (+)

- Political structure, political strength (+)

- Female labour force participation (+)

Decomposition model of school expenditures

(Schultz, 1987, 1988, Falch and Rattsø, 1996, 1997, 1999a)

• In Europe the teacher wage is often determined centrally

• The decision-making on teacher input is usually decentralized

• Likely that different factors influence the different components

School expenditures Wages Teachers Classes= * * +

Population Teacher Classes Students

non-wage expenditures Students*

Students Population

Teacher wages

• Positive income effect• Positive effect of the number of students• Positive effect of unions• Effects of the state of the labour market

• References (USA: Craig and Inman, 1982, Luizer and Thornton, 1986, Currie, 1991, Walden and Newmark, 1995, Hoxby, 1996, Vedder and Hall, 2000, Walden and Sogutlu, 2001, Eberts et al, 2002; UK: Bee and Dolton, 1995, Dolton and Robson, 1996; Norway: Falch and Rattsø, 1996, 1997)

Teacher – student ratio

• Positive income effect• Positive effect of the number of students• Positive effect of unions• Effects of the state of the labour market• Effects of “financial stress”• References

(USA: Thornton, 1979, Craig and Inman, 1982, Currie, 1991, Hoxby, 1996, Figlio, 1997, Flyer and Rosen, 1997; Norway: Falch and Rattsø, 1996, 1997, 1999a; Cross-country: Schultz, 1987, 1988)

Non-wage spending per student

• The component with highest growth during 1950 – 1990 in the US (Hanushek and Rivkin, 1997)

• Positive income effects

• Smaller effect of number of students than on teacher demand

• References (USA: Craig and Inman, 1982, UK: Taylor and Bradley, 2000; Norway: Falch and Rattsø, 1996, 1999a)

Enrolment in compulsory education

• Decisions on the number of years of compulsory education

• Little existing evidence

• Likely to depend on the assessed importance of education

• Likely to depend on the “financial stress” in the public sector

Educational attainment• Demand for tertiary education determined by

individual decision-making. • Standard theory for investment in human capital:

Undertake more education as long asU(Ed) - U(Non-ed) > CostsIf U = the wage W, this can be written

• Optimal education time increases in the wage premium and unemployment, and decreases in the discount rate and study costs

T t*

Ed Non ed Non edt t t t t

t t* t 0

W W W Costs

• Supply can be restricted by governments by deciding quotas in the universities.

• Can individuals be denied university admission in a globalized educational market?

Determinants of educational attainment

• Empirical work support the investment theory of human capital

• The wage premium increases attainment (USA: Dellas and Sakellars, 2003; UK: Whitfield and Wilson, 1991, McVicar and Rice, 2001; Sweden: Fredriksson, 1997; Germany: Lauer, 2000)

• More generous financial aid programs increases attainment (USA: Dynarski, 2002, Seftor and Turner, 2002, Long, 2003; Sweden: Fredriksson, 1997; Finland: Häkkinen and Uusitalo, 2003; Germany: Lauer, 2000)

• Tuition decreases attainment • (USA: Survey of Leslie and Brinkman, 1987, indicates an elasticity of -0.6 – -0.8, Kane,

1994, Noorbakhsh and Culp, 2002)

• The real interest rate decreases attainment • (USA: Dellas and Koubi, 2003)

• Increased unemployment has positive effect (USA: Betts and McFarland,1995, Dellas and Sakellaris, 2003, Dellas and Koubi, 2003; UK: Whitfield and Wilson, 1991, McVicar and Rice, 2001; Finland: Häkkinen and Uusitalo, 2003; Spain: Fernández and Shioji, 2001; Germany: Lauer, 2000)

• University enrolment constraints decrease educational attainment (Sweden: Öckert, 2002; Greece: Psacharopoulos and Papakonstantinou, 2004)

• But, parental background seems to be more important than economic incentives (Kane, 1994, Haveman and Wolfe, 1995, Björklund and Jantti, 1997, Lauer, 2000, Fernández and Shioji, 2001, Pollak and Ginther, 2003)

• What is most important for long term growth?

Public expenditures in tertiary education

• Ehrenberg (2000). - Rapid increasing costs due to more competition and ”winner-take-all” society - Colleges and universities can be organized in more cost-effective ways.

• Lowrey (2001). US state government funding seems to be negatively related to the share of elderly residents and positively related to tax income.

• Rizzo (2003). Negative effect of increased spending on compulsory education

• Goldin and Katz (1998). High correlation across US states in private enrolment over time

Potential educational reforms with implications for public sector

expenditures

• Compulsory education. Attempts to increase quality by accountability systems instead of increased spending? (Peterson and West, 2003)

• Previous reforms of compulsory education in Norway determined by politic factors and not by economic factors (Falch and Rattsø, 1999b)

• Tertiary education. Increased competition and private financing? (Johnes and Johnes, 1994, Johnstone, 2004)