Nova workboard

a blog from young economists at Nova SBE


Importance of data for evidence on the Human Capital Theory

The Human Capital Theory was brought to life by Gary S. Becker in 1964 and has ever since been widely used as an economic theory trying to explain the reasoning behind educational choices. The theory states that an individual chooses to study if the benefits of the wage exceed the tuition costs and the opportunity costs of forgone earnings. In the first-best world the decision of education is not dependent on income, since it is assumed that there are no imperfections in the capital market and everyone can borrow freely. In real life this is not the case and many low-income families face liquidity constraints when deciding whether to invest in education.

It is widely established in the literature that family income and education are correlated (Björklund and Salvanes, 2011; among others). But more challenging is it to establish exactly what mechanisms are causing this relationship. Three possibilities are commonly used as explanations:

1)      Abilities are correlated through generations

2)      Human capital of the parents increase children’s cognitive skills

3)      Liquidity constraints that may lead low income families to under invest in education

The policy implications from each of these explanations are different. It is therefore important to delineate the significance of the three separately. This is very demanding in terms of data and the empirical evidence so far has been limited and also very ambiguous. A study by Checchi (2003) uses a panel of macro data of 108 countries to investigate the relationship between the income distribution and enrollment rates. He finds that liquidity constraints may limit access to secondary education. Furthermore, the more public resources that are invested in education the weaker the constraint is. He concludes that there is no support for the hypothesis of talented parents foster talented children.

Another study from 2003 that finds complete opposite results is by Heckman and Carneiro. They use American micro data to investigate the relationship between family income and students in higher education. They find that high-income families have a higher share of children in higher education. But by stratifying their sample by grades they do not find any significant differences between family income and children enrolled in higher education. The grades are still a function of income and they conclude that the disadvantage of being a student from a low-income family is to be found in the earlier years of schooling. In other words, it is not the liquidity constraint that prohibits educational investment of low-income families. They recommend that public educational investments could take form as a preschool program or high quality primary school to students from low-income families.

But can we really use recommendations from studies like the above for policy interventions, when data is limited and results are so ambiguous? The main obstacle when trying to investigate the mechanisms of educational choices is the lack of high quality data. And the subject of educational inequality is not only a question of distributing wealth more equally, but the right policy intervention could also increase productivity and the wealth of society as a whole. Therefore, collecting higher quality of educational data is an important task for future research – and also for the education of future generations.

References

Becker, GS, 1964, “Human Capital: A Theoretical and Empirical Analysis, with Reference to Education”. Chicago. University of Chicago Press.

Björklund & Salvanes, 2011 “Education and Family Background: Mechanisms and Policies”. Handbook of the Economics of Education.

Checchi, D, 2006, “The Economics of Education: Human Capital, Family Background and Inequality”. Cambridge University Press.

Carneiro PM., Heckman J., 2003 “Human Capital Policy”, IZA Discussion Paper No. 821.

 

By Anne

 

 

 

Advertisements


1 Comment

Should I Stay or Should I Go?

Portuguese Higher Education System – Incentives and Deterrence for Leaving

The present crisis has revealed several weaknesses in lots of countries, mostly in the sectors that depend directly on government budgetary funds. The Portuguese Education System is clearly a weakness compared to other developed countries with 66% of its population graduating with low qualification levels.

Since the establishment of the first Portuguese University in the 13th century to the middle of 20th century, Higher Education has traditionally been a place for the privileged few. This scenario has changed significantly in the last 40 years and democratization of Portugal has brought a deep reform to all the Education System aiming to reduce inequalities and promote universality.

Currently, Portugal has about 1.200.000 graduated and almost 400.000 students enrolling more than 4.200 tertiary courses, between public or private institutions and universities or polytechnics.

The enrollment rate in Portuguese Colleges has been increasing up until the last three years. Nevertheless, there’s been an increasing number of students who are now leaving the system. What I would like to know is whether their decision is rational or not. The value is higher than the EU 27 average and it is really important to understand which reasons can lead to this decision.

First of all, we all know that High Education has strong benefits, particularly in terms of income that can be represented as a Wage Premium by students who have higher education degrees. Furthermore, these students statistically have a lower probability of being unemployed. That is to say, however, that under the current economic conditions, people need to think about liquid welfare and the fact is that benefits are decreasing and higher costs are becoming more relevant to families as their average budget has decreased.

We still have a large incentive to graduate: in terms of earnings, recent graduates in 2009 received a wage premium of 61% (although the difference is lower than it was 10 years before). Since 2001 the unemployment rate increased dramatically for every levels of education, however the unemployment rate is still lower for graduates (but the difference has also decreased in 10 years).

Therefore, we may conclude that although the incentive has been stronger in the past, attending University is quite worthy. Rationally, students who have the ability to conclude their programs shouldn’t leave. Moreover, with all the austerity measures and pay-cuts on wages, the opportunity cost of studying is also decreasing which makes the present a very a good moment to invest in education.

So, why are students leaving Higher Education?

The Council of Portuguese Public Universities Rectors (CRUP) tried to answer this question. They concluded from a recent report that the main two reasons for dropping out are expected-unemployment and expected-income as was discussed before. Based on family risk aversion, CRUP considers that, regarding the decreasing incentives for funding tertiary education cost, students may rationally prefer to leave and there is nothing we can do about. It is simply market forces interacting. However, I am strongly convinced that there are two more reasons leading to this trend: credit constraints and unwise Major decisions.

The first one, is obviously about financial aid: banks aren’t lending so easily (with high borrowing interest rates) and students don’t know a lot about private options. To help them, we could think about increasing social benefits for disadvantaged students, but considering the future expected-benefits I would suggest the private market solution with some public intervention to control interest rates, which subsequently may reduce the risk assumed by students.

Secondly, I believe Portuguese students are choosing Majors imprudently because they think they must go to University regardless of the reasons. In most of the cases, if they have low grades to enroll at the field they would prefer, they choose one where the enrollment grades are lower because it typically has too many vacancies (considering the market demand). Then, when they realize that they don’t like their field of studies or when they learn it has a high expected-unemployment graduate rate, they decide to drop out. The Portuguese government is giving a wrong sign and we could avoid such situations by reducing vacancies and reorganizing the Portuguese Higher Education Map, a topic I will discuss in full detail in a later post.

by Dino Alves


Education and Growth: a debate

“We trust our health to the physician; our fortune and sometimes our life and reputation to the lawyer and attorney. Such confidence could not safely be reposed in people of a very mean or low condition. Their reward must be such, therefore, as may give them that rank in the society which so important a trust requires. The long time and the great expense which must be laid out in their education, when combined with this circumstance, necessarily enhance still further the price of their labor.”

Written more than two hundred years ago, Adam Smith’s An Inquiry into the Nature and Causes of the Wealth of Nations already referred one of the most well established facts in Economics: on average, more educated people receive higher wages.

Taking this reasoning to a macro level, economists believed that the answer to promote long term sustained growth is to invest on human capital. This idea was one of the most important features of the “new growth” literature initiated by Lucas (1988) and Romer (1990). To cut a long story short, if the first scholar suggests that the productivity of the labor force depends on the aggregate skill level, the second one argues that more educated workers often generate more innovative ideas. Under this framework, development is mainly the result of endogenous rather than external forces. Therefore, knowledge based economies benefit from spillover effects and from positive externalities from education (Acemoglu et al., 2001).

Nevertheless, the macroeconomic data has failed to demonstrate that the impact of education on aggregate output is greater than the aggregation of the individual impacts. Moreover, the impact of education has varied widely across countries (Temple, 1999). There are three possible explanations. First, if schooling performs a signaling role, social returns to education can be lower than private ones leading to unreasonable human capital accumulation which has lowered economic progress. Furthermore, while the supply of education has expanded, the demand for educated employment persisted lower in some nations. Consequently, marginal returns to education fell rapidly. Last but not least, educational quality is also not the same from country to country.  In those cases where it has been consistently low, “the number of years of schooling” did not raise cognitive skills considerably. Although it is clear that the magnitude and combination of these three phenomena vary worldwide, explaining the actual economic impact of education constitutes an outline of central significance for policymakers.

In recent times, other economists broke the previous consensus and adopted a “revisionist” perspective, highlighting that the role of education to development has been overstated (Princhett, 2001).

To conclude, there are two main reasons that contribute to this dispute between these extreme versions. The first is due to the difficulty to define, in a conceptual way, a proper measure of what human capital is. Finally, the second argument reflects the low quality of data gathered to perform empirical studies, especially in developing countries (De la Fuente and Domenech, 2006).

João Pereira dos Santos

 

References:

Acemoglu, A., & Angrist, J. (2001). How large are human-capital externalities? Evidence from compulsory schooling laws. NBER Macroeconomics Annual, 2000, 9–59.

De la Fuente, A., & Domenech, R. (2006). Human capital in growth regression: How much difference does quality data make? Journal of the European Economic Association, 4, 1–36.

Lucas, R., (1988).On the mechanics of economic development. Journal of Monetary Economics, 22(1), 3–42.

Pritchett, L. (2001). Where has all the education gone? World Bank Economic Review, 15(3), 367–391.

Romer,P. (1990).Endogenous technological change. Journal of Political Economy, Part 2, 98(5), S71–102

Temple, Jonathan, 1999. “A positive effect of human capital on growth,” Economics Letters, Elsevier, vol. 65(1), pages 131-134, October.


Natural ability and the future of education

“There are places on earth, in every country, where, for various reasons, good schools cannot be built and goods teachers cannot or do not want to go…” (Sugata Mitra) These places are in a downward spiral, because, despite being places where education is most needed, they get the worst, or even no education.

Sugata Mitra, Professor of Educational Technology asked himself, when he was a Professor of computer programing in New Delhi University, why so many rich parents he knew tended to believe that their children had a natural ability for computing. Are rich families’ children born with a natural ability whose poor families’ children do not have?

To test this, he installed a computer in a wall that divided his university from a poor Indian slum, where children were poor, did not know any English and had no idea of what internet was. He let the computer there to be used freely by those children and left. About 8 hours later, he returned and found those children browsing on the web and teaching each other how to do it. How could they do it? He talked about this with his friends and one possibility was that some university student passed by and taught them.

So he repeated the experiment in a remote village 300 miles away from his university, where he was pretty sure no one knew how to use a mouse, browse, etc… He installed a computer in a wall and left. A few months later when he returned, he found kids that never had any sort of contact with English or computers before, playing computer games and asking him for a “faster processor and better mouse”, as well as using several English words between them. There was no one in that village that could teach them that, so Sugata got completely flabbergasted. When he asked these children how they did it, they answer that they had to “teach themselves”.

This gave rise to the project “Hole-in-the-Wall” that has implemented these computers in all sort of remote places and has developed a research around this educational method that can also be integrated with the school system. The results have been extremely positive, I give 2 examples:

1

· The research was conducted at Madangir, Delhi.
· Content Assimilation test was based on the content provided in the Learning Stations.
· This Learning Stations at this site had no Internet connectivity.
· The Graph compares the performance of Test Group over a period of time (July 2004 [implementation] vs. October 2004).

2

· The study was conducted at a national level across 17 locations in 8 states.
· The duration of the study was 9 months.
· Control Group comprised of children who did not have access to the Learning Station.
· While the performance of experimental group improved, that of control group actually declined over the period.

The main pillar of this methodology is collaborative learning. Children join in groups and learn together in a playground environment that makes the learning challenge similar to a game. These children learn how to learn and teach themselves.

In places with good schools and good teachers, there is probably no need for holes in the walls, but in locations without them, this project will revolutionize children’s learning experience and will give them a brighter future. It may just start with basic English and technological skills, but it can be transformed into something much more advanced. It is certainly more realistic than building good schools in remote places, as well as making good teachers want to go there. Innovations like this will shape the future of education.

Diogo Machado

References:

Site:

http://www.hole-in-the-wall.com
http://www.hole-in-the-wall.com/Findings.html#academic

Ted Talks:

‘Hole-In-The-Wall’ Computer Kiosks Foster Mathematics Achievement – A comparative study

Parimala Inamdar and Arun Kulkarni

Educational Technology & Society, 10 (2), 170-179 (2007);

Children and the Internet: Experiments with minimally invasive education in India

Dr. Sugata Mitra and Vivek Rana

The British Journal of Educational Technology, volume 32, issue 2, pp 221-232. (2001).


Human Capital: A Trap

Returns to education are a self-evident truth that is no longer disputable. Nowadays, it would be unreasonable not to acknowledge that educational expansion triggers favorable outcomes for countries and individuals. In a World Bank report it can be read that education has proved to be strongly correlated to reductions in poverty, illiteracy, and income inequality; that it is a counterpart on lower child mortality, better nutrition and on the construction of democratic societies.

Back in the 60’s, international organizations of reference were going further than this. They were announcing the potential of education on accelerating economic prosperity. The idea that investment on education would promote growth was well recognized and easily spread around. For the following 40 years, the secret to the success was thought revealed. Faith in education fueled an explosion of public investments and miracles happened in the most immature areas. For instance, in 1960, Nepal was registering a 10% enrollment rate in primary education but 30 years after it scored 80%.

However, economic returns to educational explosion were disappointing, as Easterly concluded. In fact, evidence showed that, for some exercises, there was a negative significant relationship between education and growth. Examples of this contradiction were Angola and Mozambique with high educational investments resulting in muted growth, or Japan with moderate investments and huge growth rates.

Asides these unsatisfactory examples that Easterly highlighted, author’s intension was to rise a big question “where has all the education gone?” In this sense, I question the validity of the education indicators measurement; this is, is it all about delivering education or is it about the way means were used? Is it about education quantity or quality, coverage or accumulation?

Many factors might have undermined countries’ performances and many others might have compromised the validity of some conclusions. Thus, allow me to introduce you to a growth model developed by Becker, the founder of the Human Capital Theory, that provides an interesting point to this discussion.  

HCT states that education is an investment that makes individuals more productive and which accrue them a future stream of benefits. Accordingly, human capital – embodied education, is accumulative and able to foster economic development, as the later depends on advances in technology and scientific knowledge.

The model includes fertility rates as an endogenous variable and it states that higher fertility increases discount rates on per capita future consumption. Another assumption relies on a positive rate of return on investments in human capital as the stock of human capital increases. As a result of both hypotheses, high stocks of human capital discourage fertility rates since childcare becomes more and more perceived as resource consuming, and vice versa.

The conclusion of the model highlights the relevance of initial levels of per capita human capital. These levels determine the convergence point of an economy, irrespective of the initial stock of physical capital. Results point to the existence of two stable steady states corresponding to undeveloped and developed countries, respectively. One accounts for little stock of human capital and high fertility rates, the other regards economies with high levels of accumulated human capital and low fertility rates. Therefore, both steady states yield different rates of return on human capital investments, which justify the different forms of success of education explosion across countries. Thus, human capital may represent a trap for many countries, undermining their evolution and setting their convergent point.  

As results might not fulfill lofty feelings on human capital, Becker and his co-authors suggest that there is hope on education for trapped countries. In the case of a push – either technological or in forms of human and physical capital investments, big enough to elevate the stock of human capital above the level of the developed steady state, economies can actually take off and develop towards a pleasant state.

570

References:

Becker, Gary S. (1994) Human Capital: A Theoretical and Empirical Analysis with Special Reference to Education. The University of Chicago Press. Human Capital, Fertility, and Economic Growth, p. 323 – 350

Easterly, Williiam (2001) The Elusive Quest for Growth: Economists’ Adventures and Misadventures in the Tropics. MIT Press. Educated for What?

Hannum, E. & Buchmann, C. ( 2003) The Consequences of Global Educational Expansion. American Academy of Arts and Sciences

World Bank (2002) Achieving Education for All by 2015: Simulation Results for 47 Low-Income Countries. Washington, D.C: World Bank.


Why don’t black people win Nobel prizes?

Ever since the creation of the Nobel prize in 1901, only Sir William Arthur Lewis, a Saint Lucian economist, won a scientific Nobel Prize (i.e., other than Peace or Literature).  Considering that about 1.5 billion people in the world are black (around 20%), this number seems oddly low.

A first glance at this data led people to advance different explanations depending on the historical time or current paradigms. Not many years ago, the accepted justification was simply that Black people were less smart, as they consistently performed worse in IQ test scores. After the post-war period, this hypothesis became much more controversial and nowadays it would probably be easier and likelier to find people accusing the Nobel Committee of race discrimination.

Does empirical research confirm any of these hypotheses?

Focusing on the US reality – due to data availability -, and contrary to politically correct arguments, the truth is that the existence of a Black-White IQ gap is indeed a robust and well documented empirical regularity.[i]

But does this mean Black people are less smart? Well, over the years, many potential explanations for the observed gap have been advanced. Some claim environmental reasons, including differences in health and nutrition, socioeconomic status or test bias; others believe the differences are mainly genetics.  However, there is little evidence for the former reason, and no support for the latter interpretation[ii].

Why then do we observe this gap? Can Education, i.e. differences in the quality of education[iii], be the main explanation? In fact, many economists believe so.

Among the firsts to grasp this relation are Steven Levitt and Roland Fryer. In 2002, they showed that contrary to previous research, the gap among Black and White kindergartners disappeared when they controlled for a set of observable characteristics of the children and their environment[iv]. However, between the beginning of kindergarten and the end of first grade their paths start to diverge and Black students start to lose ground relative to White students with similar characteristics. After testing for a number of possible explanations, the only hypothesis which received any support was that Black students attended lower quality schools on average. What is interesting about their research is the definition of quality. Even though Blacks and Whites attended similar schools in terms of traditional dimensions of quality (class size, teacher education, etc.), whey they considered a wider range of “non-standard” quality measures (gang problems in school, percent of students on free lunch, amount of litter around the school, whether or not students need hall passes, etc), Blacks did indeed appear to be attending much worse schools.

Although their results suggested no strong genetically-driven racial differences in intelligence, they pointed out that it does not preclude all potential roles for genetic contribution either, as the control variables included in the regression can themselves be partly genetically determined.

Despite this evidence, some economists still believe in different explanations. Jack Heckman is one of them. For him, racial gaps in achievement are primarily due to gaps in skills that emerge even before children enter school. More than passing along their genes, families are the major producers of skills which in turn are determinants of life success. Therefore, inequality in family environments is strongly linked to inequality in skills and school achievements. Investment in the early lives of children is therefore the best policy to help close achievement gaps of Black kids.

Whatever the true explanation is (different innate ability, quality of education or human capital of the parents), the solution seems to be consensual: more public intervention in early childhood education. Experts believe that more than remediate the problem later on, policy should prevent in early stages of the children development. If our Governments succeed to do so, we will probably be seeing much more Black Nobel Laureates in the next generations.

Ana Lemos Gomes


[i] According to Rushton & Jensen (2005), this gap is about 15 to 18 points or 1 to 1.1 standard deviations, which implies that only 11 to 16 percent of the Black population have an IQ above 100 (the White mean).

[ii] According to reports by American Psychological Association (1996) and a 2005 literature review article on the links between race and intelligence in American Psychologist (confirmed by Johnson & Houlihan (2009)) that stated that no gene has been shown to be linked to intelligence.

[iii] Even though the majority of them points the quality of schools as the main cause, Hala Elhoweris, Kagendo Mutua, Negmeldin Alsheikh and Pauline Holloway have advanced the ratial discrimination by the teachers as the main reason.

[iv] The variables included: children’s age, child’s birth weight, a socio-economic status measure, WIC participation, mother’s age at first birth, and number of children’s books in the home.


1 Comment

“We don’t need no education, teachers leave the kids alone”?

An assessment on the social returns of education

Despite what Pink Floyd convey in their song “Another Brick in the Wall”, modern societies tend to favour education to the point that it is mandatory to attend school for a certain number of years. Indeed, compulsory education is at the base of the educational system of the majority of countries. Why is compulsory education so important for modern societies?

Compulsory education is considered to be a right of children. It prevents children from entering the labour market too early. As children cannot make the decision of going to school, compulsory laws are a way for society to ensure that they have a basic education. Indeed, it is not only of the interest of the individual to have an education, but it is also of the interest of the society. This is because education is thought to create positive externalities. That is, the private return to education, usually evaluated by a wage increase, does not fully represent the benefits of schooling. In this comment, I will focus on the non-marketed impacts of educational attainment such as in criminality, political involvement and intergenerational education performance.

First, education can contribute to the reduction of criminality. Lochner and Moretti (2001) estimate that high school graduation decreases the probability of going to prison by about 0.76 percentage points for whites and 3.4 percentage points for blacks, using data for the US. Also, they claim that this represents about 14-26% of the private return to education. Furthermore, Anderson (2010) estimates that a minimum dropout age of 18 would reduce arrest rates by 17% for individuals aged between 16 to 18 years old in the US.

Moreover, education seems to increase civic participation. Milligan, Moretti and Oreopoulos (2004) find a significant relationship between educational attainment and voting, at least in US (this is not found for the UK). They also observe a higher interest in political issues in more educated people.

Also, education can improve the education of offspring. The paper by Oreopoulos, Page and Stevens (2003) shows that the education of either parent contributed to reducing the probability of their children repeating a grade by 2 to 7 percentage points, using data from the 1960, 1970 and 1980 U.S. Censuses.  This is related with the issue of how parents influence their children’s education. Then, the authors conclude that educational policies can partly reduce intergenerational transmission of inequality.

All in all, it seems that compulsory education finds support in the positive externalities of education. Indeed, the value of education for society appears to be higher than the private return of education. Despite all the evidence provided, one should note that the different levels of educational attainment produce different results. For example, it is likely that the impact of higher education is much smaller, while the effect of education at early ages is much more effective. This raises an additional issue: how many years of education should be mandatory? Indeed, it is not clear, so we see that the ending age of compulsory education varies from country to country. In some, it has even been rising it, as is the case of Portugal that increased from 16 to 18 years old the age at which students can leave school.

Nevertheless, these are results that policy makers should take into account. So, after all, maybe the teachers should NOT leave the kids alone… 

Sofia Amaral

____________________________________________________________________________________

References:

Anderson, D. M. (2010). In school and out of trouble? The minimum dropout age and juvenile crime. University of Washington. Working paper.

Cabus, S. & De Witte, K. (2011). Does school time matter?—On the impact of compulsory education age on school dropout. Economics of Education Review, Elsevier, vol. 30(6), pages 1384-1398.

Lochner, L. (2011). The impacts of education on crime, health and mortality, and civic participation. Vox: http://www.voxeu.org/article/wide-ranging-benefits-education

Lochner, L., & Moretti, E. (2001). The effect of education on crime: Evidence from prison inmates, arrests, and self-reports. NBER Working Paper, 860, 5.

Milligan, K., Moretti, E., & Oreopoulos, P. (2004). Does education improve citizenship? Evidence from the United States and the United Kingdom. Journal of Public Economics, 88(9), 1667–1695.

Oreopoulos, P., Page, M. & Stevens, A. (2003). Does Human Capital Transfer from Parent to Child? The Intergenerational Effects of Compulsory Schooling. NBER Working Papers 10164, National Bureau of Economic Research, Inc.


Public Policy in Education – Where to spend the money?

Education is a pillar of a country’s development. It reflects knowledge and human capital formation necessary for innovation and progress of both the society and the economy.

James Heckman and his co-authors investigated education and training policies over the life cycle of a person, and Ludger Wößmann and Gabriela Schütz, from the European Expert Network on Economics of Education, wrote in accordance that “the formation of skills is a life cycle process that exhibits both recursive productivity and complementarity.” The first concept means that what we learn at one period is an input for the learning process of the next period, while the second means that the productivity of the learning process at a given stage is positively affected by skills acquired in previous stages. Furthermore, they tell us that the returns to a Euro spent on education decline as we consider higher levels of education.

As a result, to get the highest return on these investments, that is, to pursue efficiency, public intervention must be done at early stages, particularly due to its dynamic effects in terms of improving later learning.

Nevertheless, public policies are also concerned with an equitable society. In addressing this issue, the authors depicted figure 1, reproduced below, showing the different patterns of returns on investment for children coming from low-income and high-income families.

Image

From the figure, one can conclude that interventions at early ages are more beneficial for all, but especially for children from poorer backgrounds as they result in a compensation for the lack of home stimulation and skills foundations that may hamper the probability of succeeding in later levels of education. Thus, without that investment, it would be particularly costly for them, in terms of effort, to engage in higher levels of education as their learning process is less productive when compared to students who acquired more skills during childhood.

As so, even though children from a higher socio-economic background wouldn’t benefit as much from investments at early stages, they will be the main beneficiaries of investments at later stages. And this is so because their stimulating background helped them develop the necessary skills to increase the productivity of their learning function.

All in all, investment at early stages targeted at children from a disadvantageous background is the most equitable as well as the most efficient policy. Meaning that, it is simultaneously directed to those with a deficitary level of skills formation (equity concern) and those with a higher rate of return from the investment (efficiency concern). On the contrary, public interventions at later stages of education and adulthood face a trade-off between equity and efficiency: in equity terms it should target children from poorer families, but from an efficiency perspective it should address students from high socio-economic backgrounds. Therefore, the decision on where and with whom to spend the money will depend on the positioning of society’s preferences in terms of this trade-off.

 

Reference: Wößmann, L. and Schütz, G. (2006) “Efficiency and Equity in European Education and Training Systems”, European Expert Network on Economics of Education, Working Paper

 

Sofia Oliveira


>

Is an MBA still worth?

I finished my MBA in 1995 in a top European school, which certainly influenced my professional path by significantly increasing my career options. It was not common for recruiters to see often such a degree in a CV, and INSEAD had a relative strong reputation in Europe by that time. I wonder if it is still the case today.

If we take a look to the latest research from the Graduate Management Admission Council, which surveyed 4,135 business school alumni who received their degrees since 2000, there is no doubt. The answer is a clear YES. But digging lightly into the data may raise some issues.

Only 86% of the MBAs of 2011 found a job right after the program – compared to 88% in 2010 – which represents an unemployment rate of 14% upon graduation. But 12% out of the 86% returned to their previous job, which leave us with an adjusted unemployment rate of 16%. Furthermore as the survey was not mandatory for all participants, and the sample was not randomized it may face issues of self-selectivity which may worsen the estimated unemployment rate even further; i.e. an unemployed alumni may be less willing to answer the survey than an employed one.

Looking into the jobs the trend is also not famous if we compare 2011 and 2010, with just 1% taking executive jobs in 2011 against 3% in 2010, 8 percent taking senior-level positions against 14% the previous year, and 21% taking entry-level jobs against just 17% in 2010.

For the top schools the numbers become better but the trend is still there. I remember that almost 100% of my promotion found jobs after the MBA experience in 1995, and most of them took senior-level positions, which nowadays is no more the case for my school.

At that time having an MBA was considered a “specialty”, clearly positively differentiating a CV for a management professional candidate. Nowadays it tends to be considered a more “commoditized” item in a good CV.

Nevertheless not having an MBA may be a not negligible handicap when competing for a job with other candidates with such a diploma, thus a negative differentiation factor. Then, compared to 1995, other academic positive differentiating factors may be more relevant today for “specialty” type CVs in the management world, like research masters and PHDs. We can then raise the following question: where will these inflationary trends in academic abilities lead the CVs of management candidates?

Manuel Lancastre


A race to the bottom – lowering the corporation tax.

Earlier this spring the Danish central-left government decided to lower the corporation tax from its previous level at 25 pct. to the new 22 pct. The Danish government are following the British, Swedish and Finnish governments who already have lowered their corporate tax down to 20 pct (http://www.information.dk/telegram/458770).

This is done both to secure the Danish firms do not choose to leave the country, but also to attract more Foreign Direct Investments and international companies. The obvious argument is of course that it is more attractive for companies to be located in a country or region with a lower tax, but there is also another theoretical argument for lowering the tax. The theoretical models explain that a company will get more out of its investments by a lowering of the corporate taxes. Therefore the should be a mechanism for firms to invest more, hire more and thus create growth for the economy.

But the empirical evidence for this miracle cure is quite weak.  Over the past 30 years the corporation tax has gone down quite significantly, both in Denmark and the rest of Europe. But the level of investments has fallen at the same time, and there has not been registered notably higher growth (http://www.information.dk/458748).

At the same time as the Danish government decided to lower the corporate tax, a new British study showed that the vast majority of companies do not want to move to another country, just to avoid paying tax. The British auditing and consulting firm Grant Thornton has done a survey of more than 3.450 business leaders in 44 countries. They found that 67 pct. answered that they would not move their business to another country no matter how much corporation taxes were lowered (http://www.information.dk/458744). 

For Denmark the figure was even higher. Here 78 pct. of the respondents answered that they would not move, no matter how low the corporation tax would be. Some sectors, such as the financial sector, are responsive to tax incentives, but for other sectors, it is clearly not the case. The companies make decisions based on other factors such as infrastructure, workforce and market analysis.

For the companies who seek a lower corporation tax, changes country of a slightly lower corporation tax will not choose Denmark, Sweden or the UK. They will more likely choose Romania, Bulgaria or Ireland. But this is not a sustainable growth strategy. Take Ireland as an example; here it is often companies that will contribute little to the economy because they do not place their production in the country, but often their headquarters, which they can channel their profits to.

Therefore the European governments should move away from using the corporation tax to attract business. It is a logic without any financial evidence, which in turn is very unfavourable for both the internal market and Europe’s social cohesion.

By Ulf

 

 


Homogeneous or Heterogeneous ability grouping classrooms?

Education is said to be the major engine of a nation`s sustainable future that envisages achieving a living standard that meets the needs of the people, mainly by providing the route for scientific and technologic progress, culture vitality and social cohesion. Indeed, through time, it has been highly discussed issues regarding student success and achievement. In this context, we may ask ourselves which one works the best for obtaining more favorable educational outcomes – ability grouping or mixed learning, that is, homogeneous or heterogeneous classrooms?

Heterogeneous grouping has intrinsic two main ideas. The first refers to the situation whereby students with different intellectual ability learn together in the same classroom, while the second indicates within-classroom groupings in which “students of varying abilities learn together in cooperative learning arrangements”[1]. On the contrary, ability grouping can be regarded as a practice that distributes students among classrooms taking into account their perceived capacities for learning, thus students of similar academic level are placed within the same group for instruction. In particular, although the Portuguese law demands that residence should be the criteria of allocating students to different schools, my perception is that public schools tend to pick students according to their socioeconomic background and academic performance with the main goal being achieving a higher reputation in the market. In fact, I believe that these selection mechanisms are nowadays politically and socially accepted that sometimes is even instigated by some experts in the field.

Relatively to the main advantages associated with heterogeneous grouping, its proponents have argued in favor of skill building and improved reading levels thanks to teamwork practices as students try to regulate mutually. They typically point out as an example the Collaborative Strategic Reading, whereby students are able to share and teach each other. On the other hand, ability grouping is defended as a practice that stimulates academic achievement by allowing teachers to focus instruction on like-ability students thus “adjusting the pace of instruction to students´ needs”[2]. In the Harvard Education Letter, Leon Lynn and Anne Wheelock state that “schools that reserve the highest quality educational opportunities for the “best” students -as determined by a selection process that is often flawed and discriminatory – are denying many students the opportunity to achieve their full potential”[3]. Emily et al (2003) found out that grouping by ability deprives low-ability students of opportunities to learn effectively and peer, personal and teachers´ expectations of poor performance may end up reducing their motivation. Nevertheless, Lou et al (1996) showed that assigning high-ability students to a heterogeneous class may create inappropriate incentives as they will spend time helping their peers instead of learning something new. An interesting work by Melser (1999) “measured the self-esteem of gifted students in homogeneous groups and compared them”[4] to the ones in a heterogeneous class. The result indicates that gifted students in the heterogeneous group have a boost in their self-esteem, while when included in a homogeneous setting their self-esteem decreases. In the US, McEwin, Dickinson, and Jenkins (2003) concluded that 78% of middle schools in 2001 used some degree of ability grouping. Hence, this result emphasizes the trend to move towards homogeneous classrooms as recent studies showed that the academically strongest benefit more from ability-grouping, especially in subjects as science and maths.

Finally, how much differentiation is it too much? If girls, who are said to be more collaborative in the classroom and boys, who tend to be more competitive in class differ significantly, does that mean that schools should incentivize single-gender schooling[5]?


[4] Effect of homogenous and heterogeneous ability grouping class teaching on student’s interest, attitude and achievement in integrated science, Adodo S. O.* and Agbayewa J. O, Science and Technical Education Department, Adekunle Ajasin University, Akungba Akoko, Ondo State, Nigeria, 18 January, 2011

[5] A widely publicized 1992 study by the American Association of University Women reported that girls appear to benefit greatly from single-gender classrooms

Ana Correia


On the returns of education in Africa

            Human capital is a common term in economic analysis, and it is used in several fields of economics. Nevertheless it is not an old term, it was actually presented only in 1993 by Becker.[1]It was developed by analysing education not as a consumption good, but as an investment, which is probably the most reasonable way to analyse secondary and more even, tertiary education.

            Although in this model people are “capital”, normal microeconomic theory holds and we can analyse this as in any other model: ultimately, people will maximize their welfare. Given this, investors, (of education), will compare the gains of education, (greater productivity and higher wages in the future), with the costs of studying, (tuition for example, furthermore, time spend studying is time not receiving wage).

            A big problem for people to achieve the optimum level of education is liquidity constraints, but are these a serious problem in European countries for example? Most European governments have strong social concerns in what regards education, and allow most of the population to study.

            But let’s consider a third world country – in this scenario liquidity constraints are a serious concern, and it is well known that only a small part of the population is enrolled in secondary education, as it is observable in the following table, that present the values for sub-Saharan Africa enrolment in primary secondary and tertiary education:

 

1960

1970

1980

1990

1995

Primary

41,3%

53,8%

71,8%

72,6%

77,6%

Secondary

3,5%

7,8%

16,5%

21,2%

24,5%

Tertiary

0,2%

0,6%

1,5%

2,5%

3,1%

Source: the economics of Education, Daniele Checchi

The difference between primary education and both the subsequent types of education is astonishing. Is this only a result of liquidity constraints and lack of infrastructure in education? Checchi distinguish two types of education, one that creates minimum capability’s (primary), and one that can be perceived as an investment in human capital.

Let’s adapt behavioural theory, (people are averse to risk), to the lack of advanced education in sub-Saharan countries, and linking this with the human capital model presented by Becker: In this countries Risk is much higher –political institutions are frail, in most cases, and the state of nature where a person will be able to exert the knowledge acquired in superior education is not very likely. Furthermore Life expectancy at birth is low, what will also decrease the expected return from education (let’s consider together secondary and tertiary education, that I will designate as higher levels of education).

To illustrate this we can consider, probably the most striking case in this region, the second Congo war that occurred in Democratic Republic of Congo from 1998 to 2003, and resulted on the death of at least 2.5 million people, (the higher estimates go up to 5.4 million)[2]. This is one in many cases of conflicts in Africa. Given this scenario, it is likely that the liquidity constraints faced by individuals are not exerting any pressure in education, as the risk of the efforts to study bringing no benefit whatsoever is very high. So, investment in superior education is innocuous if there are no incentives for people to study. The same holds for cases of high unemployment for example.

All in all, uncertainty will lead to lower investment on education in Africa, and this will probably be more relevant than credit constraints.


[1] Source: the economics of Education, Daniele Checchi

[2] Bethany Lacina and Nils Petter Gleditsch, “Monitoring Trends in Global Combat: A New Dataset of Battle Deaths, European Journal of Population” (2005)

 

Maria Martins #540


Immigration, Education, and Labour Market Outcome

Canada is as a culturally diverse nation where immigration plays an important role in shaping the demographic landscape of the population and labour force. It remains however that immigrants in Canada have higher unemployment rates than native born citizens even when comparing across educational attainment levels. This raises a number of policy questions as to why immigrants with similar education backgrounds remain highly unemployed. Immigration in Canada focuses on bringing in skilled economic class immigrants based on education, skills, knowledge of national languages, and other criteria to establish them as contributors to the Canadian economy. In 2011 economic class immigrants accounted for 62.8%[1] of all newcomers which include family class immigrants, refugees, and others. 

Image

One component that has been suggested as a determinant of the difference in labour market prospects of immigrant and native born citizens is the recognition of foreign credentials that may not adequately assess education and skill attainments achieved in an immigrant’s country of origin. Because of this, many immigrants with high skills and education are underutilized and find themselves in low-skilled jobs. In 2006, only 24% of immigrants with a university education were employed in an occupation matching their field of study compared to 62% of Canadian citizen[2]. This has significant implications for occupations and areas where Canada faces worker shortages, since qualified labour may be deemed unqualified for a suitable job due to the difficulty in assessing foreign education and credentials from their home country.

Research indicates that the age at which a child migrates to Canada is also an important factor in determining their education and labour market outcome. Although no significant difference is seen for immigrants up to the age of 9, school completion rates are significantly lower for those arriving after the age of 13 with approximately 20% and 25% of male and female immigrants respectively not graduating from high school[3]. In 2010 Canada had an overall non-completion of high school rate of 11.6%, with the high completions attributed to requiring a high school diploma for entry to the labour force[4]. It is suggested that the difficulties stem from the challenges that older youth immigrants face in assimilating especially in respect to learning the native languages, French of English. Given the cumulative nature of education, immigrants entering Canada at earlier ages will have more time spent in the Canadian education system adopting the culture and language of their destination.

These challenges imply a number of policy implications for Canada both in terms of an efficient labour market and education system. Given the prominence of immigrants in the Canadian society, smooth transitions into society and the labour force is important and facilitated by appropriate mechanisms and government policies. For youth immigrants the focus must be on removing barriers to high school graduation and successful adoption of native languages. For immigrants entering with foreign education, quick and accurate assessment of skills and qualifications is an important component to increasing immigrant participation in the labour market. Increasing education completion and labour market outcomes for immigrants will in turn have positive effects for the Canadian economy overall. 

Jacob Macdonald 


[1] Government of Canada – Citizenship and Immigration: “Facts and Figures 2011” http://www.cic.gc.ca/english/resources/statistics/facts2011/index.asp

[2] René Houle, Lahouaria Yssaad. Statistics Canada 2010. “Recognition of newcomers’ foreign credentials and work experience” http://www.statcan.gc.ca/pub/75-001-x/2010109/article/11342-eng.htm

[3] Miles Corak. Statistics Canada 2011. “Age at Immigration and the Education Outcomes of Children” http://www.statcan.gc.ca/pub/11f0019m/11f0019m2011336-eng.htm 

[4] Conference Board of Canada. “High School Completion” http://www.conferenceboard.ca/hcp/details/education/high-school-graduation-rate.aspx

[Chart] Statistics Canada Labour Force Survey (CANSIM Table 282-0106)


1 Comment

Google and Competition in Europe

Image

Recently, Google Inc. was suspected to incur on anticompetitive practices, in Europe and an investigation was followed by European Commission (EC) to check whether there was evidence on an anticompetitive behavior or not.

Some outcomes from that investigation came out. EC presented four concerns, which can compromise competition: the fact that Google prioritizes its own specialized search mechanisms (as Google Local or Google Flights) on a simple web search, creating a competitive disadvantage for other specialized searchers; the content usage of other searchers from Google; the creation of exclusivity agreements with publishers on the display of Google ads; and the contractual restrictions on online search advertising campaigns.

To settle those concerns, Google proposed some antitrust concessions. The resolutions proposed were: labeling their own specialized search services and separate it, to promote a general results list; allowing other specialized searchers on its web search to prevent situations of content usage; giving publishers more freedom concerning to the display of ads on their web sites from others advertisement competitors; dropping restrictions on advertisement campaigns.

EC’s concerns were mostly based on article 102 from the Treaty on the Functioning of European Law, which states actions, or the result of actions, which may be reported as abuse of dominance. Excluding competitors from the market or highly increasing difficulty to enter in the market by anticompetitive measures, may be part of a growth strategy. However compromising innovation, and limiting market matching to customers needs is a matter that risks even more growth.

Is it a Déjà vu? 

Not so far ago, the same antitrust investigation occurred in US, however the US Federal Trade Commission did not seem too worried. Well, in fact there are differences regarding those cases, even though it is the same company in line, the geographic market changes and so does market structure. While in US 30% of market share respects to Yahoo and Bing (comScore Explicit Core Search Share Report, November 2012), in Europe Google is more popular, according to EC statements, it has around 90% of market share.

From Competition Policy principals, the minimis approach is a good way to justify authorities positioning. Taking the same actions in US the expected results are not so relevant to intervene as it is in Europe – keep in mind that, no matter the intervention done, it always creates distortions to the market which is not functioning freely, thus the decision must be taken regarding the benefits for competition vis-à-vis the cost of distortions.

Ana Santos


WHY ITALIAN TAX PAYERS SHOULD NOT LIKE ALITALIA

At the end of 2007 Alitalia, Italian flag carrier airline, with 49.9% of share State-owned, was close to bankruptcy (in 2001 the company already received a restructuring aid and in 2004 a rescue aid). It had around 2.9 billion of euro debts summing up debt towards supplier with liabilities and only 700-800 million euro assets. I say around 2.9 million because no official number was made public. In compliance with “legge Marzano” (law n. 39/2004), the company was put under special administration; Augusto Fantozzi was responsible to find an investor to save the company from bankrupting. This law is especially applicable for “big companies” failing: with more than 500 employees and 300 million of euro debt. At the time, Romano Prodi’s Government approved a loan of 300 million euro in order to guarantee the continuity of the service. Consequently, Ryanair asked European Commission to intervene considering this bridging loan a State Aid and the European investigation division started working on the case.  

In Italy, was time for elections and Silvio Berlusconi electoral campaign explicitly referred to Alitalia situation, claiming the necessity to defend the “italianità” of the firm, wishing therefore, an Italian investor. Air France-KLM’s offer of paying 300 million euro and assume all the debt obligations was not really taken into consideration. After the formation of Berlusconi’s government the law n.39/2004 was modified: the possibility of limiting competition for three years in some markets – suspending the authority of the Antitrust – and of slicing the original company and attributing parts a proportion of the workers. From a broaden point of view, this provision:

1)      Assumes by law the presence of public interest when relevant national firms are involved, condition for which competition policy can be put apart (as in art 107(2) of TFEU).    

2)      Leaves space to “legal” State aids trough the separation of a failing company in different parts. In fact the worst parts could stay public while the debt-free ones could be sold to private agents. This way the State is somehow buying the liabilities of a bad company. The procedure has been declared legal by the European Commission, since the assets have been sold on market terms[1].

In 2008 a group of Italian entrepreneurs stepped in for buying the good part of the old Alitalia, conditional to the increase of social capital for 1 billion euro and the permanence in the company board for at least 5 years. AirFrance-KLM became partners of the new good company and a monopoly was created in the Milan-Rome route (only Alitalia could serve the route up to 2013).

What is the moral of the story? Competition failed. The 300 million loan was considered a State Aid by the EC in November 2008[2], and the fine was paid by Italian taxpayers. A welfare loss incurred due to the establishment of a legal monopoly on the Milano-Rome connection and the dismissal of 7.000 workers (more than how many French plan was including). The only one maybe benefitting are the Italian “heroes” who rescued (?) the airline in 2008, but it is not for sure either. In fact the privatized Alitalia still has financial troubles… problems were just postponed and the story is not finished yet!