DOCUMENT-RESUME ED 071.152 EA 004 650 AUTHOR Schultz

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ED 071.152 EA 004 650 AUTHOR Schultz, Theodore W. TITLE Education and Productivity. INSTITUTION National Commission on Productivity, Washington, D.C. PUB DATE Jun 71 NOTE 14p.; Superintendent of Documents, U.S. Government Printing Office, Washington, D.C. 20402 (Stock No. 4000-0277, S.25)

EDRS PRICE CIF -S0.65 HC-$3.29 DESCRIPTORS Cost Effectiveness; *Education; *Educational Economics; Educational Finance; Human Capital; *Investment; *Productivity; Publications; *Resource Allocations IDENTIFIERS *Economic Growth; Efficiency; Equity; Private Benefits; Social Benefits ABSTRACT In this paper, the author looks at the contribution of education to economic growth and examines the desirabilityof public vs private financing of education from the standpointof economic efficiency and equity. The authorsees expenditures on education as an investment in human capital, the contributionto output of such an investment depending on the amount of the investment and the realized rate of return. Hecompares the rates of return for differing levels of education to the rates of ret'Irnon nonhuman capital in the private domestic economy. In addition, the author discusses the financing of education in light of the social and private benefits that accrue from education. _Thepaper concludes with a few specific comments about the benefits and financing of higher education. (DN) NATIONAL COMMISSION Walter B. Wriston, Chairman. ON PRODUCTIVITY First National City Bank

IW. Abel. President. United Steelworkers of America Joseph A Beim°, President. Membership Communications Workers of America Frank Fitzsimmons. President, International Brotherhood of Teamsters Lane Kirkland. SecretaryTreasurer, American Federation of Labor and Congress of Industrial Organizations Chairman John H. Lyons. President. Peter G. Peterson. International Association of Bridge. Secretary of Commerce Structural and Crnamental Iron Workers Members George Meany. George P. Shultz. President. Director. Office of Management and Budget American Federation of Labor and Congress of IntInstrial Organizations Beverly Briley. Mayor of Nashville Floyd E. Smith. President. John B. Connally. International Association of Machinists Secretary of the Treasury and Aerospace %Yorkers James D. Hodgson, Leonard Woodcock. Secretary of Labor President. International Union. Virginia Knauer. United Automobile, Aerospace and Special Assistant to the President Agricultural Implement Workers of America for Consumer Affairs Wham T. Coleman. Jr.. Arch A. Moore. Dilworth. Paxson. Kalish. Governor of West Virginia Levy & Coleman Herbert Stein. John T. Dunlop. Chairman. Professor of Political Economy Council of Economic Advisers and Dean of the Faculty of Arts and Sciences, Stephen D. Bechtel. Jr.. Harvard University President. Bechtel Corporation Hosard W. Johnson. Chairman, Corporatioi, of Berkeley Burrell. the Massachusetts Institute of Technology President, National Business League Kuhfuss. President. Edward William Carter. American Farm Bureau President. Bra- dwayHale Stores, Inc. Edward H. Levi. President, Archie K. Davis. University of Chicago President. Chamber of Commerce of U.S. Areal Miller Dean, Graduate School of Business, R. Heath Larry, Stanford University Vice Chairman of the Board. United States Steel Corporation John Scott. Master of the National Grange James M. Roche. Member of the Board. W. Allen Wallis. General Motors Corporation Chancellor, University of Rochester M. Peter Venema. Chairman of the Board, Leon Greenberg. National Association of Manufacturers Staff Director a

U.S. DEPARTMENT OF HEALTH. I (N., EDUCATION & WELFARE OFFICE OF EDUCATION LC"` THIS DOCUMENT HAS BEEN REPRO. S"'"4 DUCED EXACTLY AS RECEIVED FROM THE PERSON OR ORGANIZATION ORIG. r"* INATING IT. POINTS OF VIEW OR OPIN. IONS STATED DO NOT NECESSARILY N's REPRESENT OFFICIAL OFFICE OF EDU C.) CATION POSITION OR POLICY.

EDUCATION AND PRODUCTIVITY

Prepared for the National Commission on Productivity

By: Theodore W. Schultz Professor of Economics The University of Chicago June 1971 Preface

The National Commission on Productivity was established by President Richard Nixon in June 1970 to develop recommendations for programs and policies to improve the productivity of the U.S. economy. The Commission is composed of top-level representatives of business, labor, government, and the public. In order to aid the members in their consideration of various topics, staff papers will be prepared by government or private industry experts in different subject matter fields. These papers serve as background material for the members but do not necessarily represent their views. This paper was prepared by Theodore W. Schultz, Professor of Economics, the University of Chicago. Professor Schultz presents an economic perspective for interpreting studies dealing with the return on investment in schooling and higher education and on the allocation of resources in education and research.

iii . Contents

PART A.EDUCATION AND GROWTH i 1. The Evidence I 2. The Interpretations 3 3. Conclusions 3

PART B. RESOURCE ALLOCATION 4 1. Economic Efficiency Considerations 5 2. Equity Considerations 7 3. Concluding Comment 7 APPENDIXES A. References on Education and Growth 9 B. References on Resource Allocation 10

iv Part A. EDUCATION AND GROWTH

The services of laborunskilled. skilled, including sion of economics is the development associated with all technical and professional workersaccount for the allocation of "time" by Becker (1965 Oan out- about four-fifths of the output of the U.S.economy and growth of the-role that earnings foregone plays in the the rest comes mainly from the productive services of formation of human capital and in a widearray of physical capital, i.e., (tom structures. equipment and nomnarket activities. land. The acquired skills of labor account inturn for The core of fiat available evidencecan be sum- most of the services of xtbor. The contribution of marized by presenting the rate of return estimates. It "brute labor- to production is small and it is diminish- is these rates of return that reveal what schooling and ing. Thus, a head count of laborers that failsto reckon higher education are contributing per dollar of invest- the value of skills is a very imperfectmeasure because ment to growth. In general, they show that the rate of it does not take account of the difference in the skills of return to higher education it ow additional earnings is laborers. Moreover, these skills have become increas- approximately in line with the rate ofreturn in the ingly important in explaining the growing abundance economy taken in its entirety even though the personal of the goods and-services. satisfactions that. accrue to students from their educa- My approach to the role ofeducAation in growth tion over their life time are not taken intoaccount. tests on the following propositions: (1) Increases in High school ranks higher by thistest and elementary output come predominantly -front the growth in real schooling is at the top as the following estimates show. factor inputs and only to a minor extent from "total The rate of return to investment in elementary factor productivity'. (2) The growth in theproduc- schooling appears to be upwards of 100percent. The tive services per laborer is mainly a'consequenceof first estimates. Schultz (1961, A). which is admittedly additional skills. (31 Lei eases in the general levelof a rough approximation. place it at about 35 percent. skills are attained slowly and, as a rule, graduall' over Hanoch's (1965, 1967) privaterates of return derived tune; they are in this sense long run developments from a one in thousand sample of the 1960census and not to be had either quickly or suddenly. (41 The are in the neighborhood of 100 percent. Theycon- acquisition of skills that account for the additional firm the estimates of Hansen (1963). (Thememay he quality of labor over timeconic in large part from some upward bias here because of changes in the schooling and education and associated activities. (51 no-schooling reference class.) The acquisition of these skills is inessence an invest- Becker's (1964) estimates for high schoolgraduates ment in human capital and its contributionto output restricted to white males, after personalincome taxes. depends upon the ammitt of the investmentand upon show that the private rate of the realized rate of return. return rose from 16 percent in 1939 to 28 percent in 1958 and that it has risen slightly since then. But unlike the 1. The Evidence upward trend in the rate of return to high schoolgraduates. collCge The extension of economics in analyzinghuman graduate %vete earning over thesame period in the capital is of two basic parts. The"capital'. part rests neighborhood of 15 percenton their private investment on the proposition that certain types of expenditures in their college education. (Earningsforf.g,one are in- create productive stocks embodied inman that provide cluded as part of the- teal cost of this inkcstment ) services for future periods. (Schultz.1961 A and B.) In estimating the rate ofreturn on the private cost These services consist both of personalsatisfactions that of graduate work borne by students.much depends on accrue directly to the person and of productive services how one treats the stipends thatare 'awarded to grad- that enhance his earnings. The other part of this exten- uate students. Treating them as earnings, for which

1 a very plausible case can be made, the private rate The private rates of return to schooling and higher of return to graduate work has been in the neighbor- education of non-whites in both the South and North hood of 15 percent. (Schultz, 1971, based on studies have been less stable than for whites and lower accord- by Stafford, 1968, and by Weiss, 1968.) ing to Becker (1964), Hanoch (1965), and Welch With respect to the quality of schooling, Welch (1966). Labor market discrimination is a part-of the (1966) found that the rate of return to improvements explanation. Recently, however, the job opportunities in the quality in rural farm areas (elementary and for non-white college graduates have improved mark- high school) come to about 27 percent. Johnson and edly (Freeman, 1971). Stafford's (1970) recent study, using the University As a benchmark in interpreting -each- of the above of Michigan sample of U.S. households, shows a strong estimates. we have the implicit rates of icturn for the 20 percent rate of return to quality of schooling associ- U.S. private domestic economy; they have ranged ated with low expenditure per pupil, and this rate of between 10 and 15 percent after profit taxes, but return declines, as one wouldexpect it to, as associated before personal taxes (Jorgenson and Criliches, 1967). expenditures per pupil rise. See Table 1, Column 4.

Table 1.Estimates of Private Rates of Return, United States

High school College Corporate U.S. private domestic graduates: graduates: manufacturing firms economy: implicit rate Year white males white males aftcr profit taxes of return after profit after personal aftcr personal but bcforc personal taxes but bcforc personal taxes* taxes* taxes** taxes*** (I) (2) (3) (4)

Percent Percent Percent Percent 1939 . . . . 16 14.5 1949 . 20 13. + 12. 6 1956. .. . 25 12.4 7.0 14. 4 (1955-56) 1958. . . . 28 14.8 (for period 12.3 (1957-58) 1947.-57) 1959... Slightly higher than in 1958 9. 7 1961 . . . . Slightly highcr than in 1958 11.2 (1960-61) 1963-65 13. 3

*From Becker (1964), p. 128. **Also from Becker (1964), in which he draws on a study by G. J. Stigler (sec p. 115 and n. 2). ***From Jorgenson and Griliches (1967), p. 268. Source: T. W. Schultz, "Resources for Higher Education: An Economist's Vicw", Journal of Political Economy, Vol. 76, No. 3 Chicago: University of Chicago Press, May/June, 1968.

The capabilities of laborers are also enhanced by complementarity between the amount that has been post-school investment.On-the-job training and the invested in schooling and higher education on the one acquisition of experience play a large role in increasing hand and the amount of post-schooling investment the stock of human capital. Using Mincer's (1962) that follows, is firmly established; college graduates first set of estimates, Schultz (1962) shows that the acquire the most, high school graduates substantially human capital in males in the U.S. labor force as of less and those who enter the labor force with only 1957 from their investment in on-the-job training came elementary schooling acquire the least in adding to to about -$347 billion compared to the educational their capabilities by means of post-schooling invest- stock of capital in the labor force at that time of $535 ment. billion. Although there are no explicit rate of return There is an appalling lack of evidence on pm-school estimates pertaining to this class of post-school invest- investment despitethe apparent national concern ment, Mincer's recent work (1970) and a major Na- about the unequal start among children when they tional Bureau of Economic Research study, virtually enter upon their regular schooling. In launching the completed, strongly support two major inferences: (1) headstartprograms to reduce this inequality. the con- Post-school investments continue to be very large and tributions that these programs were expected to make they systematically increase life-time earnings; (2) The became grossly exaggerated. These expectations could

2 not be realind. (Ribich, 1968.) The heterogeneity of tributions to the home is also clearly evident. Another the home inputs that characterizes the families with source of bias, also downward. arises from the increases children who receive a-bad start and that of the com- du ing the last decade in part-time work by students munities in which they reside has made and will con- while attending high school and college. The effect tinue to make it exceedingly difficult to design pro- of this development is to reduce the earnings foregone- grams appropriate to the task. Measurement of the and thereby reduce substantially the private cost of results have been plagued by no end of problems per- the education (Schultz, 1971, Chapter 7). The esti- taining to data, method, and the precise purpose of mates cited above have not been corrected for this this program. development. Despite these trials and errors, there are strong rea- The, estimates for elementary schooling are un- sons for believing that pre-school investment ranks doubtedly biased upwards as a consequence of the high, even higher than that pertaining to elementary "deterioration" in the_capabilities of the no-schooling` schooling both in terms of rates of return and on (or with less than five years of schooling) class which equity grounds. It is obvious there are no earnings soaves as the reference group in making these particular foregone from the value of the time of the children estimates. at the pre-school level. The required investment must It must also be kept in mind that these estimates are in large part be made by motivating the mothers for stales and some of them are restricted to white of the children who are reared in homes beset with males. They are derived from earnings net of personal disadvantages and by enhancing the ability of these taxes in Becker's study. The earnings profiles that have mothers to give their children a better start than been estimated -by Hamel] (1965) are the bestnow they are now capable of doing. Thus, it becomes a available. dual investment, for it is a means of increasing the Then, too, these estimates are the private rates of skills and knowledge_both of mothers with low levels return and not social rates. 'There are difficulties of schooling and through them that of their children. aplenty in estimating the social rates of return that I would expect, in view of the economic &equi- would be counteivarts of the private rates presented. libria that characterize the schooling enterprises in the Becker's (1964) perceptions of the "Social Productivity United States at this juncture in our history, thatpre- Gains" from college suggest that the social and private school investments will prove to be consistent exten- rates may be quite similar. Hansen's (1963) estimates sion of the rates of return profile associated with school- also indicate that the private rates after taxes are in ing in the following sense: The rates of return will general similar to the social rates of return. turn out to be highest for the pre-school endeavors once efficient ways of making them are discovered. 3. Conclusions

2. The Interpretations As an investment to attain additional future earnings, schooling and higher education are in generala There are several qualifications to he borne in mind good investment; the rates of return arc as high and in drawing inferences from the rate of return estimates for the most part higher than the implicit 10 to 15 pertaining to schooling and higher education. Theyare percent rate of return indicated in Table 1for the all biased downward because they do not account for private domestic economy on nonhuman capital. Con- the personal satisfactions that students derive from sistent with the difference in these rates of return, the their education during their life time. In eachcase, they stock of reproducible capital in the U.S. economy has are restricted to the additional earnings associated with been increasing at a substantially slower pace than the the education. There are some dues to the benefits stock of educational capital embodied in the labor force that are realized in addition to earnings. Recent studies (Schultz, 1971, page 129). The gradual increases in show a consistent rise in the efficiency with whichre- real earnings of laborers over time is predominantly sources are used in consumption associated with the a consequence of the additional skills of laborers and increases in the level of education. The nonmarket only to a minor extent a consequence of so-called "total value of the time of women in their economiccon- factor productivity".

3 Part B. RESOURCE ALLOCATION

There are investment opportunities in education and sectors. The other part is in the realm of social equity, research with relatively high social and private rates i.e., the effects of these allocations upon the distribu- of return. It is of course difficult to identify these tion of personal income. Despite the advances that opportunities, to reallocate resources accordingly, and have been made in extending economics in dealing with to indicate changes in the organization of education social questions including the distribution of personal and research that would lead to greater efficiency. income, it is still true that the hallmtak of economics is There are, also, several major unsettled questions in economic efficiency. It stands for rigorous analytical this domain of "resource allocation" that require seri- workmanship when it is not encumbered by the social ous thought. This memorandum is addressed mainly-to problem of equity. these questions. But it is seldom that additional economic efficiency It is possible to show some evidence and arguments in the allocation of resources is neutral in its effects for the following propositions: upon the distribution of personal income. Education 1. Education and research tend to enhance the pro- and research are no exception in this respect. Never- ductive services-of the real factors of production. It is the less. the trade -off in policy choices between effi- in this sense that they contribute to growth. How much ciency and equity are not clearly established. Under they contribute for the purpose at hand dependsupon the assumption that the prevailing social preference the investment that- is made and the rate of return calls for less inequality in the distribution of personal that is realized. income, -what is often overlookedisthe fact that 2. Education and research have a rather long gesta- there are policy choices that would achieve additional tion period which extends from the time the invest- economic efficiency and that would also contribute to ment is made to the time when gains in real factor the social goal of reducing the inequality in the dis- services are realized. It is another reason whyany tribution of personal income. The followingare ex- manipulation of the funds that support education and amples:(1) The gains from agricultural research research is an inappropriate means of dealing with that reduce the real factor cost of producing foodare either inflation or deflation. Thus, the notion ofturn- piansferred, under competitive conditions,to con- ing these two sectorseducation and researchoff-and sumers and become in thelanguage of economists a on to attain particular shot t run overall price objec- consumer surplus: the lower real price of food that tives is absurd. Consider the price effects of manipu- is implied improves the personal income positionof lating public funds allocated tosupport agricultural low income families relatively more than that of high research which come to about $500 million annually. If income families. Resources allocatedto such research they were eliminated or doubled, it wouldnot alter has been efficient in terms of the socialrate of return agricultural production and prices for fiveto ten years. that has been realized and it has also contributedsome- (Evenson, 1968.) what in reducing the inequality in the distributionof 3. The thrust of the evidence is that -public and personal income. (2) The allocation of additionalre- private expenditures on education and researchin the sources to elementary schooling to equalize the quality U.S. have in general been good investmentsin terms of such schooling between thepoor and the rich school of the rates of return that have been realized. districts earns, a high rate of return aud, therefore, The unsettled issues on which I shallconcentrate represents a gain in economic efficiency: it also has the are basically of two parts. The part about whichwe effect of reducing the inequality in personalearnings have some knowledge pertains to the economic effi- later in life of the children whonow live in such diverse ciency with which resourcesare allocated to these two school districts.

4 1. Economic Efficiency Considerations Iyould point out that for each of these inputs thew will be, in all probability, diminishing returns as more of it The test of economic efficiency in using the invest- is brought into play and that the objective should be ment approach is that the allocation of resources be in to increase the use of each input to the point that the accordance with the priorities set by the relative rates rate of return on it would be neither higher nor lower of return on alternative investment opportunities. The than that of the standard of the U.S. economy. say advantages of this test are that it has a firm foundation between 10 and 15 percent. in economic theory, that it is applicable to both pri- Once we see the heterogeneity of elenuntary school- vate and public allocative decisions, that itis widely ing.it used and understood in practical economic affairs, and will eluciditte the investment opportunities. that it leads to efficient allocations when all invest- Underinvestment in elementary schooling is not char- ments are made in accordance with the above test. acteristic: of communities where the level of personal The following three questions may be helpful in income is high, where the parents are well educated taking one's bearing: and where the supply of women who have completed college is huge. On the other side of this ledger. them. I. Should we be troubled whether the allocation of are many communities where too few resources are resources to education and research is efficient or not? allocated to elementary schooling. Among those that The answer is ).es, even though the prevailingstrategy qualify are the following: (11 rural -farm cminnunities in an expanding economy beset with inflation is always to ask for more funds. The affirmative answer rests where people are mostly poor. transport costsare large. schools are often small and the salary of teachers on the fact that these two sectors have become very un- attractive; (2) communities in the rural South.many large in the resources they absorb, and dimeare many of them compounded by the racial issue and the poverty possibilities for malallocations (wastefuluses of re- of Negroes: (3) also sonic of the other nonwhite sources) within these sectors and between them and popu- lations.e.g., alternative opportunities. Mexican-:'American~throughoutthe Southwest; (4) the white population of parts of Ap- 2. Is there hard evidence that private educational palachia and the Piedmont. the people who are left choice:: are privately efficient: that is. do private rates behind: and (5) masses of poor people crowdedto- of return to schooling and higher education tend (a) to gether in parts of the central cities that lack community be equal as among educational options, and (b) to be stability, where schools are overowden. classes in- comparable to private rates of returnto other private ordinately large, and where teaching is done under investments? The evidence 'implies substantial ye:). adverse circumstances that make itdifficult to inefficiencies. attract and hold competent. experienced teachers. 3. Are the social rates of return and privaterates Thus. considered broadly, these me the parts of the of return proportional in all of these activities?The elementary scl:l enterprise where underinvestment available evidence bearingon this questionis not is most common. sufficient to be sure of the answer. Closely associated with the underinvestment in the It should be made clear that in all that has been said elementary grades is the neglectofquality inschooling. above no account is taken of the "inefficiencies"that It extends also into high school. The combination of may occur within the internal operations of schools. schoOl inputs and the amount of them that is required colleges, universities and agencies engaged inorganized to move to an optimum quality of schooling is still research. With respect to theseareas of "economic highly speculative in the sense that it hasnot 'been behavior." we have virtuallyno analysis. None has subject to the measurement and analysis that is long been analyzed less than that of highereducation. The overdue. I venture the proposition, however. that it shoemaker's children have no shoes. is mainly the competence of the teachers andthe Could it be that the economist is misledby his esti- grouping of students that would maximize their moti- mates that show high rates of returnto elementary vation to learn what matters most in attaining quality schooling, in the sense thateven though they are high. in schooling. it is in the nature of elemental) schooling that they The rate of rettun to high school has continuedto would remain high? Economic thinkingprovides a rise notwithstanding the rapid expansion of high school strong negative reply. As a matter of fact, thereare enrollment measured in terms of the proportion of the many ways of spending more on this or that part of this youth of high school age in high schools. Thereis schooling, namely, on each of the several inputs enter- undoubtedly lunch room here also to improvethe ing into elementary schooling. Moreover, the economist quality component, but its economic importance isnot

5 as clear and plausible as it is in what we sec in the strongly-held view is that students and their families elementary grades. are best qualified. Those who hold this view appeal to The rate of return estimates for higher education student sovereignty and thus to the private self-inter- arc on a par with the "normal" rates of return in the cst of students (families). There is another view that economy. Thus, it would appear, that in general there contends that there arc substantial external economies is neither under- nor overinvestment in higher educa- or social benefits that accrue not to the student, but to tion when itis viewed in its entirety. But this is a others in society and therefore these allocative decisions misleading view because higher education is an ex- can best be made by public or other social bodies. What ceedingly beterogenoous aggregate ranging from small is the contribution of schet31 administrators in manag- community colleges to universities of the highest qual- ing our complex educational enterprise? In view of ity. The heterogeneity within higher education con- the inefficiencies that are consequences of poor incen- ceals a wide range of returns to society and to the tives and poor information, the effects of these on the participating students, decisions of students, teachers, administrators, and In thinking about higher education as an investment, public bodies requires a brief comment. the following considerations should be borne in mind: The key to student sovereigmy is the private self- (1) The "product" of higher education, as already interests of students and of their families. Their self- noted, is far from homogeneous. Parts of it arc for con- interest would be sufficient to bring about an efficient sumption (future personal satisfactions) and parts are allocation of investment resources to education under for production (revealed in future earnings). To lump the follow ag condi :ons: them in determining the value of higher education is 1. That there be competition in producing educa- bad economics. (2) The value of each type depends on tional service along with efficientprices of these the services it renders. (3) Educational capital that services; is embodied in students requires a long horizon be- 2. That the information required by students b cause the abilities that the student acquires are a part optimal: of him during the rest of his life, (4) The acquired 3. That there be an efficient capital market serv- abilities are subject to obsolescence. The upper limit ing sttidcuts; and is the remaining life span of the student; more im- 4. That there be no appreciable disassociation be- portant, however, is the obsolescence from changes tweenprivate andsocialbenefits(losses)from in the demand for these acquired abilities that arc con- education. sequences of our type of economic growth (Schultz, A clear view of the function of the private self- 1971, pp. 162-3 ), interests of students in these allocative decisions is Higher education periorms three basic functions: blurred by arguments about the underlying conditions. It discovers talent,itprovides instruction, andit Surely itis possible to have competitive pricing of engages in research. One of the major unsettled ques- educational services. Student loans from public and tions that awaits clarification and analysis is the fol- private sources can be devised to provide additional lowing: What is an efficient organization of each of capital. It should also be possible to take account of these threelivities in higher education in terms of social benefits (losses). Nor is the Achilles' Heel of scale (size of the college or university), specialization, stucent sovereignty in the domain of information location, and importantly thecomplementarily be- (Freeman, 197!) although the long standing contro- tween the discovery of talent, instruction, and research? versy over this issue is still with us as it was when the Another major unsettled issue pertains to the in- classical economist divided on it (West, 1964). adequacies that characterizeincentives and informa- The following quotation summarizes the underlying tionthat motivate and guide the allocative decisions issues inherent in the student sovereignty approach throughout higher education. I have argued elsewhere (Schultz, 1971) : (Schultz, 1971) that when it comes to making opti- In enlarging the scope and improving the per- mum allocative decisions with regard to higher educa- formance of student sovereignty in allocating re- tion, the system of incentives is weak andat many sources to.. education. the gaps in informa- points seems virtually nonexistent and thestate of tion and the distortions in incentives molly matter. information is in bad repair. This situationaccounts On earnings foregone, students are well informed. for many inefficiencies in the way investmentresources but on their capabilities as students they are in are allocated in this area. But who should make these doubt. With regard to the benefits that will accrue allocative decisions? Who isbestqualified? One to them, the state of information is far from 6 optimum. But much worse stillis the lack of fornia the net results arc regreoire in their effects- on information on the differences in the quality of the the distribution of personal income. Pednnan (11701 educational services of different colleges and uni- has expressed disagreement with the Hausen-Weisbrod versities. No where are students confronted by conclusion. He, however, has addressed his comment prices for these services that arc equal to the real to a different aspect of this problem. This cupboard cost of producing them, and therefore the prices also contains a number of other useful stneies that I to which they respond arc not efficient prices. As have listed in my "Reference" under "Other Personal a consequence, no matter how efficient students Distr;bution of Income Studies.- are privately in their decisions, front the point of view of the economy as a whole, the allocation of 3. Concluding Comment resources to ... education will not be efficient. In using economic incentives to attain economic effi- This comment is restricted to higher education start- ciency, the ideal price for the educational services that ing at the top. students obtain should 1:e neither morenor less than 1. Differences in the quality of graduate instruction the real cost of producing these services. This proposi; is in large part a consequence of the diffetences in the Lion, however, does not support the view that them quality of the research in which the graduate programs should be no difference between public and private are involved. First rate Ph.D. ieseafch is strongly de- tutitions, or lot matter, among public or among pendent upon first rate faculty tesearch In general, the markw-for the services of Ph.D.'s pays substantial Private schools. Equality of tuition would merelyme- place one type of price distortion by anothertype be- life time premium, for quality. The rate of return on cause it would conceal the difference in cost of the the resources required to achieve type of quality quality difference of educational services. A major is in all proimbilite high. step in improving the state of information would he 2. There is evidence that the rate of return to on- the development of efficient prices to which stir:gents mulcts research tends to be highest in the major re- could respond. But more than this is required. They search oriented universities. Evenson's(19611) stittlF must know what they are buying. Specifications that supports thisconclusion. (Also see. Schultz. 1971. arc only in quantitative term.; (years of schooling) are Chapter 12.) not sufficient. Much depends upon knowing the dif- 3. There has been a tendency in allocating federal ferences in the quality of the educational services. funds to favor graduate instruction and university Truth in advertising might well be appliedto the research in those parts of higher .education where the catalogues that uttiversiues issue. rate of return in general is low compiled to returns that ame. realived in the major research oriented uni- 2. Equity Considerations versities. It is a tendency that et inconsistent with the test of economic, efficiency. What are the effects of educationupon the distri- 'Turning to uhdergraduate instruction. the pn, bution of personal income? Theway it is financed and calling programs, with few exceptions, are not inte- the manner in which the benefits from itare distributed grated with on-campus research. Whether under- among the population, the net results are in all proba- graduate programs would be mote efficient if students bility far from neutral. There is littleroom for doubt were involved in research is :sot known. although there that education changes the personal distribution of are plausible reasons for believing that they would he income over time. It is understandable that this issue more efficient. of equity should become a major social question. Na- 5. There is some evidence that suggests that when tional concern about it is bound to increase. especially account is taken of the differetnes in the abilities so in the executive and the legislative branches of among undergraduates when they .itter colleges. the government and in public discussions pertaining to the value added to their abilities while in college is larger allocation of public funds to education. for those who attend colleges with relatively small_ The analytical cupboard is not altogether bare. undergraduate enrollments than itis for those who Becker's (1967) approach is basic. We also have the attend colleges where the ewollineets are large. recent excellent survey of the analytical developments 6. Otte of three functions of higher education is in this area by Minrer (1970) . There is also Chiswick's that of providing opportunities that serve students in (1967) study. Hansen and Weisbrod (1969) conclude discovering their talents for this level of learning. that in the case of public higher education in Cali- Although higher education in the United States uses a larger share of its resources for this purpose than many low income families that is characterized by capi- do the colleges and universities in Western Europe, the tal rationing that they impose upon themselves. They U. S. practice appears not to be an inefficient use of simply would refuse to go into debt to this extent. Some resources. There am many chips that indicate that the subsidization of this class of students is warranted both returns from this activity to society and also to students in terms of equity and economic efficiency. privately are relatively high. 10. In general, privately supported colleges and 7. Most families in the United States have the neces- universities have evolved programs of financial assist- sary income and wealth to pay thefull costof _the un- ance for the minority of students, discussed in 9 above. dergraduate instruction of their children. Moreover. that are superior and more effective than are the pro- full cost pricing of these educational services would grams of the publicly supported colleges and univer- greatly increase the allocative efficiency of higher sities. education. 11. The formulation of theGrand Designfor trans- 8. Since higher education is in essence an investment ferring federal funds to the "states' should be that and since the benefits accrue predominantly to the such funds should be allocated directly to the persons student, there is a strong argument for improving the who wrmld benefit from using them for the purposes capital market so that it will serve students better than intended and to the agencies that provide particular is presently the case. Public funds for student loans is services that are deemed necessary on public accounts one important way of achieving this objective. and for which there is no effective private- demand. 9. There is, however, a minority of-potential college Accordingly, federal funds to assist undergraduate stu- students who are qualified in terms of ability, but who dents should be transferred dire-ctly to such students come from families with small incomes and-with very and funds to support nonprofit research should be little wealth. Student loans may not suffice for them transferred directly to the universities and otherre- in view of the fact that-many of these familiescannot search agencies -that are efficient in undertaking such forego the earnings of their children. Increasing -the research. Conversely, such transfers of federal funds amount of the student loans to compensate for the should not go first to the states, and from -there to cities earnings foregone would make such loans inordinately or counties, and then to the colleges and- universities large. More important, however, is the behavior of for research and to enrolled students.

8 Appendix A: REFERENCES ON EDUCATIONAND GROWTH

Becker, Gary S., 1965. "A Theory of the Allocation of , 1970. "The Distribution of Labor Incomes: Time," Economic Journal, 75, September,pp. 493- A Survey with Special Reference to the Human 517. Capital Approach," Journal of Economic Litera- , 1964. Human Capital, Columbia University ture,8, March, pp. 1-26. Press, New York. Ribich, Thomas I., 1968. Education and Poverty., The Freeman, Richard, 1971. The Market for College Brookings Institution, Washington, D.C. Trained Manpower: A Study in the Economics of Schultz, T. W., 1961 A. "Education and Economic Career Choice, Harvard University Press. Growth," Social Forces Influencing American Edu- Hanoch, Giora, 1967. "An Economic Analysis of Earn- cation, Nelson B. Henry (ed.), University of Chi- ings and Schooling," Journal of Human Resources, cago Press, pp. 78-82. pp. 310-329. 1961 B. "Investment in Human Capital," , 1965. "Personal Earnings and Investment in American Economic Review, 51. March,p. 3. Schooling." unpublished Ph.D. dissertation. Uni- ,1971. Investment in- Human Capital: The versity of Chicago. Role of Education and of Research. Free Press, New Hansen, W. Lee, 1963. "Total and Private Ratesof York. Return to Investment in Schooling," Journal of Po- , 1962. "Reflections on Investment in Man," litical Economy, 71, April, pp. 128-140. Journal of Political Economy, 70, October, Supple- Johnson, George E. and Frank P. Stafford, 1970. "So- ment, Part 2, pp. 1-8. cial Returns to Quantity and Quality of Schooling." Stafford, Frank P., 1968. "Graduate StudentIncome University of Michigan, presented at the Econo- and Consumption," Ph.D. dissertation. Graduate metric Society Meeting, December. School of Business, University of Chicago. Jorgenson, D. W. and Zvi Griliches, 1967. "The Ex- Weiss, Yoram, 1968. "Allocation of Time andOccu- planation of Productivity Change," Review of Eco- pational Choice," Ph.D. dissertation. Stanford Uni- nomic Studies, 34-, July, pp. 249-283. versity. Mincer, Jacob, 1962. "On-The-Job Training; Costs. Welch, Finis, 1966. "Determinants of theReturn to Returns, and Some Implications," Journal of Po- Schooling in Rural Farm Areas, 1959," unpublished litical Economy, 70, October, Supplement. Ph.D. dissertation, University of Chicago.

9 Appendix B: REFERENCES ON RESOURCE ALLOCATION

Becker, Gary S., 1967. Human Capital and the Per- West, E. G., 1964. "Private versus Public Education;' sonal Distribution of Income: An Analytical Ap- Journal of Political Economy, 74, October,pp. 465- proach, Woytinsky Lecture No.1,Institute of 475. Public Administration and Department of Eco- nomics, University of Michigan, Ann Arbor. OTHER PERSONAL DISTRIBUTION OF INCOME STUDIES: Chiswick, Barry R., 1967. "Human Capital and the Becker, Gary S. and B. R. Chiswick, 1966. "Education Personal Income Distribution by Regions," unpub- and the Distribution of Earnings," American Eco- lished Ph.D. dissertation, Columbia University. nomic Review, May, pp. 358-369. Evenson, Robert, 1968. "The Contribution of Agricul- Chiswick, B. R., 1968. "The Average Level of-School- tural Research and Extension to Agricultural Pro- ing and the Personal Distribution of Income by duction," unpublished Ph.D. dissertation, University Regions: A- Clarification," American Economic Re- of Chicago. view, June, pp. 495-500. Johnson, Thomas, 1969. "Returns from Investment in Freeman, Richard B., 1971. The Market for College Schooling and On,The-Job Training," unpublished Trained Manpower: A Study in the Economics of Ph.D. dissertation, North Carolina State University, Career Choice, Harvard University Press. Raleigh; also his "Returns front Investment in Hansen, W. Lee and Burton A. Weisbrod, 1969. Bene- Hum, %vital, American Economic Review, 60, fits, Costs, and Finance of Public Higher Education, 19/0, pp. 546-560. Markham Publishing Company, Chicago. Mincer, Jacob, 1969. "Schooling, Age and Earnings. Mincer, Jacob, 1970. "The Distribution of Labor In- in -Human Capital and Personal Income Distribu- comes: A Survey with Special Reference to the tion, National Bureau of Economic Research in Human Capital Approach," Journal of Economic progress. Literature, 8 March, pp. 1-26. Schultz, T. Paul, 1965. "The Distribution of Income: Pechman, Joseph A., 1970. "The Distribution Effects Case Study of The Netherlands," unpublished of Public Higher Education in California," Journal Ph.D. dissertation, Massachusetts Institute of Tech- of Human Resources, 3, Summer,pp. 361-370. nology; also his Statistics -of the Size Distribution of Schultz, Theodore W., 1972. "Human Capital: Policy Personal Income in the United States, prepared for Issues and Research Opportunities," National Bu- the Joint Economic Committee of Congress. 88th reau of Economic Research, New York. Congress, 2nd session, December, 1964. Soltow, Lee (ed.), 1969. Six Paperson the Size Distri- Schultz, Theodore W., 1971. Investment in Human bution of Income and Wealth, Columbia University Capital: The Role of Education and of Research, Press,forthe National BureauofEconomic Free Press, New York. Research.

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