Chapter 9 – Education, page 1 of 8• why is education important to development?1. so far, labor has been considered a homogeneous good in the production function;however, effective labor input depends on the skills labor has (human capital),which depends partly on education (note, however, that it is difficult to establish acausation between education and higher income/development)2. from a policy standpoint, there is under-investment in some education sectors thathave a high rate of return and over-investment in some sectors that have a low rateof return; there is pressure to invest in certain levels of education althoughsometimes the rates of return at these levels of education are lower than are availableelsewhere in the economy3. even if education were not important for productivity, it is still an important part ofthe economy because much investment, labor, etc. goes into it; education isdemanded for greater productivity/income and also as a good for consumption4. education plays an important social function; through education students acquirethe idea of citizenship, modern outlooks, etc.; education could change behaviorfavorably for development (for example, female education is negatively correlatedwith fertility, which could be due to an attitudinal relationship)• page 324, table 9-1 – statistics about education:• levels of schooling vary as expected with income level (PPP) in 1995:GDP percapita (PPP)adultilliteracyenrollment ratio in higher education(beyond secondary schooling)<$1,000 49% 1%$1,000-$4,000 31% 8%$4,000-$7,000 12% 25%$7,000-$12,000 12% 23%$12,000+ 5% 59%• enrollment in primary education is not as responsive to income above $1,000 per capita(PPP); all income groups have net primary education enrollment ratios greater than 90%except the <$1,000 per capita income group, which has a 42% net enrollment rate; thegross enrollment rate refers to the proportion of students enrolled in the level ofeducation in question relative to the proportion of the population in that age range (agross enrollment rate of 108% for primary schooling indicates that students above andbelow the usual age range for primary school are enrolled in primary school); netenrollment rate refers to the proportion of students of the normal age range that areenrolled in the level of education in question• the amount of secondary schooling depends more on the level of development/incomethan does primary education:Chapter 9 – Education, page 2 of 8GDP per capita (PPP) gross secondary school enrollment<$1,000 20%$1,000-$4,000 55%$4,000-$7,000 67%$7,000-$12,000 72%$12,000+ 106%thus, by 1995 primary schooling was nearly universal except in the poorest countries,but the level of secondary schooling varies• the level of schooling varies across countries based on other factors; for example, thereare sharp differences in public expenditure on education across countries (such as from$25 to $4,500 on education per pupil for primary education); these differences inexpenditure are partly due to differences in cost among countries but also the quality ofeducational resources – thus, when assessing education, not only is the enrollment rateimportant but also the quality of education• the age-earnings profile:• the age-earnings profile shows the average income at different ages of workers withdifferent levels of education;• the age-earnings profile for Mexico in 1963:9 years of schoolingaverageearnings 8 years of schooling E30 1 year of schooling20010 15 30 60 age (years)the worker with one year of education (or a primary education, depending on how thegraph illustrates schooling) earns 200 pesos per month at age 10, which increases withage (as maturity, experience, strength increase) until it tops out, after which it decreasesslightly (as working ability decreases)• this graph can also be illustrated using primary schooling, secondary schooling, andpost-secondary education:Chapter 9 – Education, page 3 of 8college/post-secondary educationaverageearnings secondary schooling E30primary schooling10 15 30 60 age (years)• the different curves illustrate different wages at the same ages due to differenteducation levels; for example, E30, marked on the graph above is the difference in wagebetween a worker with 8 years of schooling and a worker with 1 year of schooling at age30; the graph can be used to determine the absolute amount of the expected difference inwage at all ages – this is useful when measuring the returns to education• estimating the returns to schooling and cost-benefit analysis:• the returns to schooling can be estimated by 1) discounting to the present earningsover time and 2) considering the foregone income by individuals who enroll in schoolinstead of workingfor example, if one individual enters the workforce at age 10 with primary educationand another enters the workforce at age 15 with secondary education, then the verticallyshaded area is the foregone income (the cost) of the individual who attends secondaryschool; for the same individual, the additional income (the net benefit) of attendingsecondary school is the horizontally shaded area:averageearnings secondary schoolingprimary schooling10 15 30 60 age (years)an individual will determine whether to attend secondary school by comparing thepresent discounted value of costs with the present discounted stream of benefits• calculating the present value of the benefits of additional education:the present value of the benefits of additional education in year t is given by page 333,equation 9-1:Chapter 9 – Education, page 4 of 8tttoiEV)1( +=Vot = the present value of the benefits of additional education in year tEt = earnings increment in year t due to the additional educationi = the interest ratet = the number of years the earnings must be discounted to the presentfor instance, the present value of the difference in earnings with a secondary educationversus a primary education 30 years from the present is given by:3030sec3030)1( iIIVprimaryondaryo+−=Vo30 = the present value of the benefits of additional education in year 30I30secondary = the income earned with a secondary education in year 30I30primary = the income earned with a primary education in year 30 (note thatI30secondary - I30primary =E30)i = the interest rate30 = the number of years the earnings must be discounted to the presentthe overall additional earnings stream of getting additional education must be added upover