Economics: Economics of Education

Topics from microeconomics and fields applying it, such as game theory, health economics, environmental economics, the Vermont economy and urban and regional economy, and urban and regional economics. Includes a substantial writing component. Topics vary by offering; periodic offering at intervals that may exceed four years. May be repeated for credit with different content. Prerequisites: STAT 1410, ECON 2400, and ECON 2450.

Prereqs enforced by the system: ECON 2400 and ECON 2450 and STAT 1410; May repeat for credit if topics differ. PACE students with permission and override. Instructor permission

This course provides a comprehensive exploration of the economics of education, examining key concepts, market dynamics, policy frameworks, and the impact of education investments. Students will gain foundational insights into the economic role of education, covering topics such as the education production function, school funding, and the effectiveness of resource allocation. Through an analysis of market-based policies, accountability measures, and teacher labor markets, the course investigates factors that influence educational efficiency and student outcomes. Key areas of study include the role of economists in shaping education policy, the unique characteristics of the education market, and the investment decisions that drive educational attainment. Students will explore empirical methods to estimate returns on education, assess the effects of class size, teacher quality, and school choice policies, and understand the complexities of accountability in education. Special attention is given to teacher recruitment, compensation, and union influences, as well as incentive pay models and certification requirements. By examining these themes, students will be equipped to analyze and evaluate education policies from an economic perspective, with a focus on enhancing efficiency, equity, and quality within the education system.

Getting foundational understanding of the economics of education, covering essential concepts, methodologies, and policy frameworks. Students will explore the role of economists in studying education policy, with a particular focus on defining key concepts within the field. They will learn to apply the scientific method to education policy analysis and examine the role of markets within the education sector. Furthermore, students will gain insight into various types of education policies and recognize how these policies function as incentive structures designed to influence educational outcomes. These insights will prepare students to analyze education-related issues through an economic perspective. Discussing the unique structure and characteristics of the education market, contrasting it with traditional commodity markets. In this market, families and students represent demand, while institutions serve as suppliers. Unlike other markets, education features imperfect competition, spillovers, differentiated services, local production, asymmetric information, peer effects, and customer involvement in the production process, all of which influence policies at various government levels. The U.S. education system encompasses four levels—early childhood, K–12, post-secondary, and graduate education—each with increasing specialization. Provision of educational services often differs from funding sources, with public, private, and mixed financing. While the public sector plays a leading role in providing and regulating education, private not-for-profit institutions are also significant, and private for-profit institutions are expanding. The rationale for public sector dominance includes the social benefits of education, economies of scale, and challenges in quality assurance. Historically, the U.S. has seen substantial educational attainment growth through periods like the common school movement, the high school movement, the expansion of postsecondary education, and a shift toward market-based policies. However, the recent slowdown in attainment growth, especially in college completion, contrasts with rising labor market returns to education, motivating policymakers to consider reforms that could better align educational outcomes with economic opportunities. Next we introduce the human capital model, providing a framework for understanding education as an investment decision influenced by the costs and benefits associated with schooling. Students will learn to assess how various factors, such as direct costs (like tuition), expected future earnings, and labor force participation, impact individuals' educational choices. In addition, students will explore reasons for differences in educational attainment, including variations in financing options, anticipated benefits, and individual characteristics that affect the perceived value of education. The model highlights policy implications, suggesting that education policies can address disparities in educational investment by recognizing factors like ability bias and credit constraints. Finally, students will gain insights into the social versus private returns on education, understanding the potential motivations for public policy interventions, and will be introduced to the challenge of measuring education's effect on skills and earnings. In addition, we explore the returns to education investment, with a focus on both social and private benefits. Beginning with an opening story that questions the value of investing in education, the module explores empirical evidence on educational returns through various analytical approaches. Key methods include examining identical twins to control for genetic factors and using ``random" variation in education, such as quarter of birth, to estimate returns. The concept of college quality is introduced, with separate analyses on its social and private returns. A deeper investigation compares the outcomes of two-year versus four-year colleges and estimates the returns to college quality using a regression discontinuity design. The module concludes by summarizing insights into the effectiveness of education investment, providing highlights that encapsulate the complex relationship between educational attainment and economic returns. We will examine how schools operate as cost minimizers, aiming to produce educational outputs at the lowest possible cost based on their resources and input prices. Efficiency in school production is achieved when the marginal product per dollar of each input is equalized, meaning resources cannot be reallocated to increase output further. The concept of the education production function is introduced, which specifies how various inputs combine to produce educational outcomes, although this process differs from typical consumer goods production due to incomplete knowledge of relevant inputs, the multiplicity of outputs, and a lack of understanding of the underlying technology. Key properties of production functions are explored, including positive marginal product, diminishing marginal product, and different returns to scale. In addition, the module discusses three types of resource-based policies—total resource, input, and output policies—highlighting their effectiveness based on how efficiently schools allocate resources. Estimating education production functions presents challenges due to non-random resource allocation across schools and students, leading to potential biases in assessing the causal effect of inputs. Further complications arise because many educational outcomes are difficult to observe, meaning production function estimates may not fully capture the effects of specific inputs on education. We will examine the complex relationship between school funding, resource allocation, and student achievement. Despite significant increases in education spending over the past five decades, research shows only a weak correlation between expenditures and measurable improvements in student performance, a critique notably advanced by Hanushek. While evidence suggests that smaller class sizes and high-quality teachers can positively impact student outcomes, challenges in implementing these changes—such as limited teacher supply and ineffective hiring practices—hinder their potential. Political constraints and weak incentives also prevent education officials from using resources efficiently to maximize student achievement.

This course places a strong emphasis on writing assessments. Students are expected to write with the understanding that their work is not just for grading and will be read by the instructors, but also for a broader audience, including the general public. For instance, when sharing research output with the general public, students should write in a way that assumes no prior expertise in the field and present their findings in a non-technical manner. In addition, through various writing tasks, students will learn how to strengthen their arguments for policy changes or reforms and articulate their position clearly in a policy debate. Exams This course includes two in-class writing exams (a midterm and a final) to ensure students grasp the foundational economic theories essential for understanding education policy. The introductory classes will focus on key microeconomic concepts, such as market mechanisms, to help students analyze the structure of education markets. Since the course emphasizes both demand-side and supply-side education policies, economic theories are crucial as mental tools to frame discussions on topics like education production and the signaling role of education. The exams, designed similarly to those in a preliminary economics course, will consist of essay questions. They serve as both a learning incentive and an assessment tool, ensuring students develop a strong understanding of the economic frameworks necessary for meaningful discussions on education policy. The exams will also provide a way to evaluate whether students have adequately grasped the foundational concepts that underpin the broader topics explored in the course. Writing Exercises Engaging in recurring writing exercises is essential for developing a deeper understanding of the key topics discussed in class. To achieve this, students will complete a writing exercise for each module. These exercises are designed to include three specific activities: