06a. Economics of Education: Crash Course Economics #23. Part 1/2.
Adriene: Welcome to Crash Course Economics, I'm Adriene Hill. Jacob: and I'm Jacob Clifford. Some of you might be watching this video in school right now, but even if you're not, you've probably spent a good chunk of your life getting educated. Adriene: Nearly all countries require at least some mandatory schooling and most of those countries provide that education for free.
Jacob: But nothing is ever actually free. There's always an opportunity cost. The money and resources that go into education might be used to fund other social programs or bring down the debt.
Adriene: And if you go to college, the cost is not just the tuition and books, it's also the income you could have earned by going straight into the workforce. Jacob: But is college even worth it? Well, let's look at the economics of education. [Theme Music]
Adriene: Why do governments spend billions funding universal public education? Why not just let profit seeking businesses handle it? Many argue that if education was entirely privatized it's likely that some children would be excluded, and that would make society, as a whole, worse off. Education is a positive externality. Education benefits individuals by helping them get a job and earn more income, but it also benefits society as these individuals create art, invent cool stuff, cure diseases, and make interesting conversation at parties. More education increases productivity, GDP, and standards of living.
So, today we're going to look at the education system in the United States. We're talking about the US not only because we make Crash Course in the US, but because education in this country is going through a lot of changes. This way, we get to talk about things like education standards, vouchers, and student debt.
Now, to be sure, there are places that do things differently. For example, in the European Union college costs a lot less than it does in the US, or is even free.
In America, the government pays for primary and secondary public education and heavily subsidizes college. In 2015, the federal and state governments will spend about 634 billion dollars on primary and secondary education. That's an average of about 12,500 dollars per student each year. Which is a lot of money.
And despite all that spending, the US has some serious problems with its education system. One of the biggest is inequality. Students from low income families tend to have lower math and reading test scores than those from higher income families. African American, Latino, and Native American students are much more likely to drop out of high school than their White or Asian counterparts.
Jacob: For some economists, the best way to level the playing field is to focus on funding. They argue that the government should pay for early education programs, and provide extra funding for disadvantaged and low-income students.
For others, the answer isn't just about more funding, it's about having more competition. Some economists support charter schools and voucher programs that allow parents to pick schools, or open enrollment among or within school districts.
Now in theory, this forces all schools to improve, or face losing their funding. Other economists focus on the teachers, and argue that they should be incentivized to improve student performance.
Each of these ideas have been implemented in the US, with varying success. We have yet to find the magic formula, but it's clear that the first step to improving equality is to invest in primary and secondary education. Now, what about higher education? Is that a good investment? Well, keep in mind that there are many reasons – not all of them economic - to go to college, and to be educated in general. People go to college because they enjoy learning and want to know more. Or maybe they want to put off getting a real job. But in economics, we focus on the financial benefits. Is college worth it?
The fact is, college graduates, on average, earn more. Economists call this the “College Wage Premium.” Among 25-32 year-olds, college grads earn an average of $45,000 vs $28,000 for those who only have a high school diplomas. Also, the unemployment rate for college grads is pretty much always lower.
Right now, for people over 25 with a college degree, unemployment is around 3%, vs. around 5.4 percent for those with only a high-school diploma. And it's 8.6 percent if you didn't finish high school. So bam – college pays off, case closed.
Adriene: Well, not quite. The people who graduate from college are NOT a randomly selected group. First, it takes a modicum of intelligence and dedication to even get into college. Second, you have to receive a fairly good primary and secondary education to be able to keep up with college work.
Third, the students who attend college are more likely to come from well-off families with educated parents who have the time and energy to help encourage their success.
So when you compare college grads to those with less education, you're often comparing people from advantaged backgrounds to people without many of those advantages. The fact that college graduates make more money isn't just about college. It's also about life circumstances. Let's go to the Thought Bubble: Jacob: Economists point out two main explanations for why college graduates earn more. The first is the “Human Capital” theory. The idea is that going to college actually teaches you skills that'll help you get a higher income job. The second theory is called “Signalling.” The idea that some students have shown they are smart and hard-working, but in a job interview, EVERYONE is going to claim “Sure, I'm smart and hard-working!” even applicants who aren't. So the talented applicants need something else to validate their abilities that can't be faked by others. A college degree sends a clear signal. "Look at me! I graduated Summa, and I've got the notarized transcripts to prove it!" Many employers would prefer an applicant that has an actual Harvard degree over one that has an equivalent self-taught education. But a college degree isn't only about signaling ability, we could accomplish that with a test that would take one day and $100, rather than 4 years and potentially hundreds of thousands of dollars. College degrees send other signals about socio-economic status and background.
BOTH the human capital theory and the signalling theory are compatible with the data: both predict that college graduates would earn more, which is what we see.
But economists have tried to figure out which theory is correct. They have compared the earnings of people who have earned 7 ½ semesters worth of college credits but didn't graduate, to people who finished and got a degree. Both groups received about the same amount of education, so if the Human Capital theory is correct, they should earn about the same amount of money. If the Signalling theory is correct, those with degrees should earn noticeably more, and they do. But it's a smaller gap than you would find from just comparing high school and college grads. It seems that both theories apply.
