|Educational Cost-benefit Analysis - Education Research Paper No. 02 (DFID, 1993, 27 p.)|
P.4 The use of educational cost-benefit analysis is now widely accepted and has definite advantages but there is also considerable unease over its use.
P.6 CBA implies the enumeration and evaluation of all the relevant costs and benefits.
P.9 CBA has been applied to people as human capital, to assess the rates of return to investment in education.
P.12 Costs are related to benefits from education, the latter being quantified via age-earnings profiles. Rates of return may be social or private, average or marginal.
P.13-19 Many practical problems arise, including whether earnings accurately reflect marginal productivities, how to adjust for the influence of factors other than education, the omission of fringe benefits, the lack of availability of time-series data, indirect benefits, discounting over time, the principle of opportunity costs, the probability of unemployment, and special factors applying to women.
P.21 Rates of return indicate whether to invest in a particular direction but can not tell us how much to invest.
P.22 Results may be biased upwards or downwards, for a series of listed reasons.
P.24 Mincer's alternative formulation calculates rates of return to schooling via multiple regression analysis using macro data, with no direct reference to costs, but the results are less implementable.
P.27 The two main alternatives to CBA are manpower planning and the social demand approach. Manpower planning attempts to forecast future demand for educated manpower, often over a fairly long time period.
P.27-28 Manpower planning assumes a rigid occupational composition of the workforce, assumes data availability re occupational mobility and withdrawal, assumes that educational background relates directly to occupation, and assumes jobs clearly differentiated, all of which may be unrealistic.
P.29 Manpower planning has largely ignored those with lower levels of education and ignores effects of wages, prices, and a series of other factors.
P.30 The social demand approach focuses on forecasts of future choices by students and their families, especially regarding higher education.
P.33-36 There have been many CBA studies in different developed countries, mostly showing quite high returns, sometimes very high, to investment in education.
P.38 Rates of return studies in developing countries show generally high rates of return, usually higher for primary education than for secondary, higher for secondary than for higher education.
P.39 Education in developing countries is shown to be profitable, with evidence of underinvestment in education. Returns are higher for general curricula than for vocational education. Public subsidisation of education is greatest in the poorest countries and at the higher levels of education.
P.40 Such studies have often found it difficult to allow for government sector employees.
P.42-48 More recent studies in developing countries have often used the Mincer approach and have varied widely in their findings. They have usually found high returns, especially high for private returns, and have usually allowed for some but not all of the methodological problems. Often data related to males only; where females were included, their returns were often higher.
P.50 Many writers have undertaken CBA studies in Third World countries but others have been very critical of the methodology and assumptions.
P.51 One writer gave a long list of points typically omitted or not allowed for in such studies and was pessimistic regarding their use. Major points related to government sector employees and to the failure to distinguish between the effects from different subjects of study.
P.52 Another criticism was the failure to allow for educational quality.
P.53-55 Other criticisms and defects of the method were also given, including problems relating to imperfections in labour markets, uncertainty regarding future conditions, the use of cross-section rather than longitudinal data, and regarding ignoring significant noneconomic benefits from education.
P.57-59 The separate school effectiveness literature disaggregates school experience and identifies those variables within schools which relate to positive educational outcomes, examples being the availability of textbooks and the setting of homework, but with different findings for different countries.
P.60 The World Bank's experience suggests that policy priorities should include emphasis on primary education, emphasis on general skills at the secondary level, and emphasis on school quality.
P.62 The comparative education literature has increasingly incorporated a human capital dimension. This literature has come to recognise differing local social and economic circumstances and thus divergent educational systems.
P.65 There is much active research taking place into CBA but also doubts regarding the validity of the CBA technique.
P.66 The notion that CBA might be combined with the manpower planning and social demand approaches was first suggested many years ago but has proved very difficult to put into operation.
P.67 The notion of "synthetic" educational planning, combining all 3 approaches, has been developed at the model-building level but has led to few if any empirical studies, due to the practical difficulties involved.
P.71 Nor has there been much progress in the direction of including school quality or effectiveness in CBA studies.
P.72-73 CBA (i) can usefully be linked more closely to cost-effectiveness analysis, as a means of comparing alternative uses of resources, (ii) could be extended to relate alternative manpower forecasts and different patterns of manpower utilisation to the determinants of private demand, which would include students' perceptions of costs and benefits, and (iii) has been used to develop or justify new policies on financing education, i.e. a new approach to CBA is already in evidence in many developing countries.
P.74 Further research is needed.