Rate of return in education

1. UNIT: 4th
The private and social return to human capital investment
INSTRUCTOR : TANZELA BASHIR

2. The private and social return to human capital
investment
Human capital
 Economics the abilities and skills of any individual, those acquired
through investment in education and training, that enhance potential
income earning.
 The collective skills, knowledge, or other intangible assets of individuals
that can be used to create economic value for the individuals, their
employers, or their community:
 Education is an investment in human capital that pays off in terms of
higher productivity.

3. What is private return to education:
 The private rate of returns to education is the increase in the earnings
from an additional year of education for an individual who makes the
investment decision on education, while the social rate of returns to
education measures the increase in national income resulting from the
same year of education (Borjas 2004).
What is social return to education?
 If education reduces crime, then schooling will have social benefits that
are not taken into account by individuals. In this case, the social return to
education may exceed the private return. Given the large social costs of
crime, even small reductions in crime associated with education may be
economically important.

4.  What is private rate of return?
 Definition: The private internal rate of return is equal to the
discount rate that equalizes the real costs of education during the period of
study to the real gains from education thereafter. Jan 30, 2003
 What is social rate of return?
 Definition: The social internal rate of return refers to the costs and benefits
to society of investment in education, which includes the opportunity cost of
having people not participating in the production of output and the
full cost of the provision of education rather than only the cost borne by the
individual. Jan 30, 2003
 Why is it important to invest in education?
 Education reduces poverty, boosts economic growth and increases income.
It increases a person's chances of having a healthy life, reduces maternal
deaths, and combats diseases such as HIV and AIDS. ... In sum, education is
one of the most important investments a country can make in its people and
its future.

5.  Why education is important for a country?
 Education reduces poverty, boosts economic growth and increases income.
... Education can promote gender equality, reduce child marriage, and promote
peace. In sum, education is one of the most important investments a country can
make in its people and its future.
 What are the benefits of education?
 Both on personal and national levels, education has been shown to increase
economic growth and stability. One of the most important benefits of education is
how it improves personal lives and helps societies run smoothly. We live longer,
fuller, and happier lives as learned and knowledgeable individuals. Dec 8, 2016
 What is the role of education?
 Main purpose of education is to educate individuals within society, to prepare and
qualify them for work in economy as well as to integrate people into society and
teach those values and morals of society. Role of education is means of socializing
individuals and to keep society smoothing and remain stable.

6. Private and social return to education
 The returns to education increase productivity is of interest to economists and
policymakers, because this issue has substantial implications regarding government
subsidies for education and economic growth.
 It is evidenced that investment in human capital has a positive return, in fact, the
average difference between the wages of a university graduate and a high school
graduate is significant in most countries.
 Not only workers with a high level of schooling are paid more, but also this difference
in earnings reflects the benefits of education and not a product of selection.
 The concept of private return to education can be synthesized through the evidence
that individuals with more education earn higher wages than individuals with lower
levels of education.

7. There are three main strands in the theory on
externalities due to education:
 1. positive private returns (signaling) to education and negative social
returns to education.
 2. positive both private and social returns to education
 3. positive social returns to education that do not apply directly to the
production process (Lange, Topel, 2006).
 In the first case, private returns are positive due to the fact that
education improves the possibilities in the job market for an individual,
but it doesn’t increase the productivity of the society.

8.  In the second case, persons with greater skill may raise the
productivity of others with whom they interact, so accumulation of
human capital may increase total factor productivity in an economy.
This second case is important because it can be understood if the
government participation in education has a rationale of efficiency.
 A third strand of literature highlights potential external benefits of
education that do not apply directly to the production process is
linked to the fact that education enables individuals to participate
more efficiently in the political process. .
 Social return external to the production process is consumption
externalities due to education.

11. Benefits of education in developing countries
 Ending poverty. ...
 Promoting health. ...
 Providing equal access to good education for all. ...
 Promoting gender equality. ...
 Ensuring sanitation and clean water. ...
 Encouraging economic growth. ...
 Reducing inequalities within and among different countries. ...
 Making cities and communities more sustainable.

12. Education and economic growth
 Education is well known to be the primary tool that promotes economic
development, economic growth.
 Education plays a significant role in the development of human capital and
enhances economic growth through productivity, provision of skills, creativity
and innovation and competitiveness.
 There is a direct contribution of education to economic growth, especially at
higher levels. This is achieved through the creation of ideas and knowledge and
innovations of technology which make workers more productive.
 A nation that aims to attain massive economic growth must give proper
consideration to quality education to the majority of its entire population. The
sector of education is the one responsible for ensuring output per worker is
added, and this can result in growth in the economy

13. EDUCATION AND PRODUCTIVITY
 High school education and higher learning institutions have significant
contribution in the establishment of essential government institutions
such as the financial organizations, the law firms, agricultural research
firms, health institutions among others. These key institutions are
significant for the achievement of economic growth.
 Studies micro and macro clearly show the relationship between education
and production output
 At the level of micro, several findings show that the more a person gets
educated, the more the income generated. So, the rate of return is directly
proportional to the level of education.

14.  In the agricultural sector, findings indicate a positive relationship
between education and productivity especially among farmers who use
modern techniques, but there is a less effect on those utilizing
traditional techniques.
 Education also plays a significant role in promoting technological
advancement and adoption in industries. Taking for example, in Sri
Lanka, statistical findings in the engineering and clothing firms
indicated a positive relationship between the technical change of the
firm and the level of skills and education of employees and investors.
 Therefore, there is a direct relationship between education and
productivity in general since productivity increase with higher
education. Education affects export growth; as a result, influencing the
overall rate of growth.

15. EDUCATION AND INCOME
Education has a positive effect on income inequality which
successively supports higher growth rates. Broadly oriented
education enables people with low income to search for more
economic opportunities to venture.

16. Education & Inequality
Economics of Education

17. Equality and Inequality in Education
Equality in Schools
 All students have access to the same resources and the same
opportunities
 Equity in education
 Resources and opportunities are created to afford equal results in
education

18. How we define inequality.

19. What do we mean when we say inequality
Economic Inequality is the state of affairs in which assets,
wealth, or income is distributed unequally among individuals
in Pakistan.
Pakistan being part of the four nations housing the highest
number of billionaires, a shocking 4 billion people in
Pakistan live below the poverty line and living on less than
50 cents per day.

20. Factors of inequality
 Growth factor.
 Highly unequal asset distribution.
 Inadequate employment generation.
 Differential regional growth.
 Effects
 Damaging to helpless populations.
 Intergenerational inequality.
 Stop the flow of cash
 Ill health problems increased
 Decreased in net reduction in educational attainment
 Economic instability

21. Education System Needs to Reduce Inequality
 Plot a clear strategy to improve the education experience for all students
and narrow inequality gap. ...
 Hold to equally difficult standards for all classrooms. ...
 Put a focus on teachers as a central force for change in the education
system. ...
 Equalize the share of resources among all school systems.

22. How does inequality affect education
An increase in income disparity has been more than
matched by an increasing gap between the money that
low- and high-income parents spend on enhancement
activities for their children.
Most distressingly, increasing gaps in academic
achievement and educational attainments have attended
the growth in income inequality.
Mar 28, 2014

23. Conclusion
Inequality is still very much a fact of life in
India.
Result of deep-rooted social and economic
structures that perpetuate privilege and limit
opportunities for the poor

24. REFERENCES
 E. Moretti, "Human Capital Externalities in Cities," NBER Working Paper No. 9641, April 2003, and Handbook of Regional and Urban Economics,
Amsterdam: North Holland-Elsevier, 2004.
 5. L. Lochner and E. Moretti, "The Effect of Education on Criminal Activity: Evidence from Prison Inmates, Arrests and Self-Reports," NBER Working Paper
No. 8605, November 2001, and American Economic Review, 94 (1), (2004).
 6. J. Currie and E. Moretti, "Mother's Education and the Intergenerational Transmission of Human Capital: Evidence from College Openings," NBER
Working Paper No. 9360, December 2002, and Quarterly Journal of Economics, 118 (4), (2003).
 Montenegro, C. E., and H. A. Patrinos. 2014. Comparable Estimates of Returns to Schooling Around the World. World Bank Policy Research Working
Paper Series 7020.
 Munich, Daniel, and George Psacharopoulos. 2018. The External and Non-Market Benefits of Education: A Review. EENEE, Analytical report No.
3/2017.Oreopoulos, P. 2006. “Estimating Average
 Guiga, H., & Rejeb, J. (2012). Poverty, growth and inequality in developing countries. International Journal Of Economics & Financial Issues (IJEFI), 2(4),
470-479.
 Reale, E., & Seeber, M. (2011). Drivers of inequalities in higher education and the unexpected consequences of equality policies. Higher Education
Policy, 24(2), 185-211. UNESCO. (2012).
 EFA Global monitoring report. Paris: UNESCO. UNESCO. (2013). World inequality database on education. Retrieved from http://www.education-
inequalities.org