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close this bookEducational Cost-benefit Analysis - Education Research Paper No. 02 (DFID, 1993, 27 p.)
View the document(introduction...)
View the documentExecutive summary
View the document1. Introduction
View the document2. Definition
View the document3. Development
View the document4. Methodology
View the document5. An alternative approach to rates-of-return
View the document6. Other techniques in educational planning
View the document7. Some cost-benefit results
View the document8. CBA in third world countries: Earlier findings
View the document9. CBA in third world countries: More recent studies
View the document10. Criticisms of CBA in third world countries
View the document11. The educational effectiveness literature
View the document12. The comparative education literature
View the document13. Towards a new approach to cost-benefit analysis
View the documentAppendix 1: Project proposal
View the documentAppendix 2: Returns to investment in education by level and country
View the documentAppendix 3: Bibliography

7. Some cost-benefit results

There have now been a large number of studies of rates-of-return to education and their results vary widely. In this section it is obviously not possible to cover them all; rather, the intention is convey the broad direction in which the field has developed over a period of nearly thirty years, with particular reference to studies in the UK and the USA. Studies of rates-of-return in Third World countries, which have developed more recently, will be dealt with in a later section.

Studies in the UK have concentrated on post-school education, and especially on that in universities. The two most widely quoted are those by Ziderman (1973) and Morris (1973). Ziderman found average private rates-of-return on degree education from age 15, using 1966-67 data, to be:


No "ability" adjustment

"Ability" adjusted

Males


First degree

15.0

12.5


Master's degree

15.5

12.5


Doctorate

16.0

13.0

Females

First degree

20.5

18.0

To arrive at these results, Ziderman used earnings survey data published by the Department of Education and Science which, after adjustments, gave him a sample of some 2,000 and he then adjusted for long-term economic growth and for the probabilities of unemployment and mortality. The right-hand column assumes an alpha-coefficient of 0.66, the left-hand column makes no such correction. No results are given for females above first degree level, as there were so few such females in the sample. The rates-of-return results are generally high, especially so in the case of females (for GCE A Level only, due primarily to the low career earnings of females with only lower levels of education).

Marginal private rates-of-return, i.e. returns on an additional or incremental slice of education, were given as:


No 'ability' adjustment

'Ability' adjusted

Drop-out Adjusted

GCE A-level

(from no qualification)

10.0

8.5

Negative

First degree

22.5

20.0

16.5

(from GCE A-level)

(23.5)

(21.5)

(18.5)

Master's degree

20.0

16.5

Negative

(from first degree)

(19.0)

(16.0)

(Negative)

Doctorate

19.5

16.0

2.5

(from first degree)

(145)

(11.0)

(Negative)

These results are for males only, due to the difficulty in obtaining adequate earnings data for females. The additional third column on the right allows for the possibility of students not completing their courses. The separate figures given in brackets gives the results for when schoolteachers are excluded (to see whether this adjustment would have a significant effect). Although the results are again generally high, the appearance of some negative results in the right-hand column is particularly interesting.

Morris was able to calculate social rates-of-return to different subject disciplines studied at various post-school levels. For university degrees, returns were mostly higher in the case of arts and social science subjects than for engineering and science, due mainly to the higher costs of the latter. Part-time courses, such as for ONC (Ordinary National Certificate) and HNC (Higher National Certificate) had much higher returns (often around 20%) than full-time courses, due to the former having no income foregone. After alpha-coefficient (0.66) adjustment, marginal social returns to first degrees were around 10%. Returns to postgraduate-level education were generally low and sometimes negative. Returns to society from educating women were several percentage points lower than for educating their male counterparts.

Birch and Calvert (1974) found high rates-of-return to training to become a teacher, very high in the case of females (around 30%) because of the poor alternatives available to females who were not so well qualified. In the case of males, the higher returns, around 12-14%, only showed up in the case of graduates and especially those graduates teaching in secondary schools. Whether it was worthwhile for teachers to study in their spare time to obtain an Open University degree depended crucially on their economic valuation of the time they would have to spend doing so. If there were no such cost, i.e. if they found such studying enjoyable, then the returns could be 50% or even 60% or more but once such cost figures were included the returns fell steeply and in the case of primary teachers could become negative.

In the USA, there have been so many rate-of-return studies that it would be impossible to mention them all.

One feature is that more work has been done at the level of returns to secondary schooling, for which Cohn and Geske give the following table of internal rates-of-return:

Reference

Sample year

Private

Social

Hansen (1963)

1950

14.5

11.4

Becker (1964)

1940

16.0



1950

20.0



1956

25.0



1958

28.0


Hanoch (1967) (a)

1960

16.1


Hines et al. (1970) (b)

1960

19.5

14.0

Mincer (1974)

1960

13.0


Carnoy & Marenbach (1979)

1940

49.1

18.2


1950

22.7

14.2


1960

14.6

10.1


1970

18.9

10.7

(a) Northern whites only
(b) Male whites only; rates for other race-sex groups vary substantially.

Returns to higher education in the USA were generally between 10% and 20%, with private returns always being greater than social. McMahon and Wagner (1982) examined the historical record of monetary rates-of-return to higher education and found these to have remained relatively stable at around 13-14%, i.e. significantly higher than the returns available on financial assets. However, Cohn and Hughes (1988) found evidence of a secular decline to returns from investment in college education.

All of the above studies, in both the UK and the USA, used the traditional method. Murphy and Welch (1989) used the Mincerian approach and found returns of 13.5% for the early 1980s, i.e., very similar to the evidence in the McMahon and Wagner survey.

As in the UK, private returns to postgraduate-level study were found, by a series of researchers, to be lower, and were sometimes negative (Cohn and Geske, 1990). However, Tomaske (1974) suggested that most other studies had failed to take full account of students' summer and outside earnings and that when these were included the returns rose to around 10%.