The return on education is the relationship between a change in an individual’s level of education and the subsequent level of his wage. The return on education can be seen as an increase in the value of an employee in the labor market, depending on the level of education he has completed. There is a belief among economists that education is one of the key factors that positively affects people's incomes.
Content
- 1 Investment in human capital
- 1.1 Personal and social returns to education
- 1.2 Expected and final return on education
- 2 Decision making in education
- 3 Quantification
- 4 notes
- 5 Literature
Investing in human capital
According to the theory of human capital, education is an investment that enhances the skills and productivity of individuals. Thus, people receive higher wages in the labor market, become more competent in the eyes of employers [1] and increase incomes.
Education is one of the most important factors in the formation of human capital, which, in turn, is an intensive factor in the knowledge economy .
Thus, like any other investment decision, investments in human capital through education entail expenses that are covered in the short term in order to get greater benefits from this in the long term.
Personal and social returns to education
The return on education can be divided into personal (private) and public (social). Personal return on education is associated with an increase in income from an additional year of education for an individual who decides on investments in his own education. The social return on education affects the increase in national income as a result of the same year of study. Often, the social return on education provides the basis for government programs, such as scholarships and student loans, aimed at improving the educational level of individuals.
Expected and final return on education
The expected return on education is associated with the expected change in the income of an individual who decides on an additional level of education. The final return is that which the individual actually received.
Education Decision Making
Why study the implications of educational decision-making? The question of whether the return on education is high enough to justify the cost of further education is an important issue not only for individuals, but also for public policy bodies. It is likely that public policies can improve the economic well-being of the poor by subsidizing their education, providing loans to college students, and introducing minimum requirements for starting studies.
It is especially important to understand the return on which level of education is most effective, how the parent's upbringing, personal preferences, school education, higher and additional education affect the individual's future incomes. For such studies, many models have been written, one of them is a model of consistent solutions throughout life [2] .
Quantification
A typical method of quantifying the return on education is possible only if there is data on income and educational levels of groups of people, as well as estimates of the percentage change in income associated with an additional year of education. According to this principle, a model is used that represents wages as a function of the training and work experience gained ( Minser equation ).
Education is supposed to increase people's income by increasing their productivity. However, there is an opinion that education can increase incomes, even if it does not make people more productive, since it mainly serves as a signal about the qualifications of workers for potential employers [3] . Employers, especially in situations where they cannot easily observe the abilities or productivity of workers, can rely on education as a signaling device when making hiring decisions.
The difficulty in quantifying the returns to education lies in the large number of implicit variables, for example, the level of ability. When evaluating the return on education, it is important to correct all differences in the individual characteristics of the data, such as ability, race, ethnicity, gender and age, and measure the impact of implicit variables. Otherwise, such a study will lead to a bias in the assessment of return on education.
Notes
- ↑ Michael Spence. Job Market Signaling // The Quarterly Journal of Economics. - 1973-08. - T. 87 , no. 3 . - S. 355 . - ISSN 0033-5533 . - DOI : 10.2307 / 1882010 .
- ↑ Joseph G. Altonji, Erica Blom, Costas Meghir. Heterogeneity in Human Capital Investments: High School Curriculum, College Major, and Careers . - National Bureau of Economic Research, 2012-4. - No. 17985 .
- ↑ Joseph Stiglitz. The Theory of "Screening," Education, and the Distribution of Income // American Economic Review. - 1975.- T. 65 , issue. 3 . - S. 283-300 .
Literature
- Michael Spence Job Market Signaling // The Quarterly Journal of Economics. - 1973-08. - T. 87, no. 3. - S. 355. - ISSN 0033-5533. - DOI: 10.2307 / 1882010.
- Joseph G. Altonji, Erica Blom, Costas Meghir Heterogeneity in Human Capital Investments: High School Curriculum, College Major, and Careers. - National Bureau of Economic Research, 2012-4. - No. 17985.
- Joseph Stiglitz The Theory of "Screening," Education, and the Distribution of Income // American Economic Review. - 1975.- T. 65, issue. 3. - S. 283-300.