DOCUMENT RESUME ED 427 065 TM 029 446 AUTHOR Liu, Yuxiang Educational Stock and Economic Output: A Quantitative TITLE Analysis. 1998-00-00 PUB DATE NOTE 23p. Reports PUB TYPE Evaluative (142) EDRS PRICE MF01/PC01 Plus Postage. DESCRIPTORS *Economic Factors; Economic Impact; *Educational Attainment; Educational Economics; Graduate Study; Higher Education; Human Capital; Income; *Outcomes of Education; Productivity; *Professional Education IDENTIFIERS *Gross State Product; Variance (Statistical) ABSTRACT A series of multiple linear regressions analyses was used to investigate the relationship between educational stock and economic output. The gross state product (GSP) per capita was used as the dependent variable. Used as independent variables were percentages of: (1) state residents with a (2) state residents with any kind of higher high school diploma and above; education; (3) state residents with an associate degree and above; (4) state residents with a bachelor's degree and above; and (5) state residents with a graduate or professional degree. Results of the multiple linear regression analyses indicate that there is a significant linear relationship, at the 0.05 level, between GSP per capita and each of the five independent variables. Results of the multiple linear regression analyses also indicate that about 19% of the variance in GSP per capita can be explained by percentage of state residents with a high school diploma and above, and about 21% of the variance in GSP per capita can be explained by the percentage of state residents with any type of higher education. About 25% of the variance in GSP per capita can be explained by the percentage of state residents with an associate degree and above, and about 401 of the GSP per capita can be explained by the percentage of state residents with a bachelor's degree and above. The percentage of state residents with a graduate or professional degree explains about 50% of the variance in GSP per capita. (Contains 7 tables and 23 references.) (Author/SLD) ******************************************************************************** Reproductions supplied by EDRS are the best that can be made from the original document. ******************************************************************************** Educational Stock and Economic Output: A Quantitative Analysis Yuxiang Liu U.S. DEPARTMENT OF EDUCATION Office of Educational Research and Improvement EDUCAJONAL RESOURCES INFORMATION PERMISSION TO REPRODUCE AND CENTER (ERIC) DISSEMINATE THIS MATERIAL HAS This document has been reproduced as received from the person or organization BEEN GRANTED BY originating it. 0 Minor changes have been made to imprOve reproduction quality. Points of view or opinions stated in this document do not necessarily represent TO THE EDUCATIONAL RESOURCES official OERI position or policy. INFORMATION CENTER (ERIC) 1 Center for Research on Teachig and Learning College of Education University of Arkansas at Little Rock 1998 BEST COPY AVAIILA ABSTRACT A series of multiple linear regression analyses were used to investigate the relationship between educational stock and economic output. The gross state product (GSP) per capita was used as the dependent variable. Used as the the percentage of state residents with independent variables were: (a) high a school diploma and above, (b) the percentage of state residents with any level of higher education, the percentage of state residents with an associate (c) degree and above, (d) the percentage of state residents with a bachelor's degree and above, and (e) the percentage of state residents with a graduate or professional degree. The results of the multiple linear regression analyses indicate that there at the .05 a significant linear relationship, level, between GSP per capita and is each of the five independent variables. The results of the multiple linear (a) about 19% of the variance in GSP per regression analyses also indicate: capita can be explained by the percentage of state residents with a high school diploma and above, (b) about 21% of the variance in GSP per capita can be explained by the percentage of state residents with any level of higher education, (c) about 25% of the variance in GSP per capita can be explained by the percentage of state residents with an associate degree and above, (d) about 40% of the variance in GSP per capita can be explained by the percentage of state residents with a bachelor's degree and above, and (e) about 50% of the variance in GSP per capita can be explained by the percentage of state residents with a graduate or professional degree. and Economic Output Educational Stock 1 Educational Stock and Economic Output: A Quantitative Analysis Yuxiang Liu University of Arkansas at Little Rock Introduction In a world where quick and easy answers are sought, there has been constant concern about the quality and the value of education. Critics of is viewed as a education have denigrated Whether education value. its promoter of human development or in human capital, an investment the as issues surrounding the worth of education are too urgent and too costly. to be left to chance. The consequence of failing to examine these issues is to continue an uninformed dialogue about worth. its As projected by U.S. Department of Education (1993), about 66.7 million students would be enrolled U.S. elementary, secondary, and higher in a quarter semester of 1996--approximately institutions educational the fall in of the whole population of the United States. Of the 66.7 million, over 14 million would be enrolled in higher educational institutions How did (p. 12). the enterprise of education so many customers? attract According to U.S. Department of Education (1993), the total expenditure of educational institutions was $466 billion for the 1992-93 fiscal year--about 7.8% of the gross domestic product (p. 36). Why is so much money from the public purse spent on education? Does education return to society as much as is spent on it or is a social service agency? What is the relationship between it education and the economy? part of the spending on education. Public money is Individual students also spend a considerable amount on their education. According to T h e Chronicle of Higher Education (Sept. 2, 1996), for the 1994-95 academic year the average tuition and fees were $2,689 at public four-year higher educational and $11,522 four-year higher educational institutions private institutions at According to the National Association of State Universities and Land- (p. 10). Grant Colleges (1996), fiscal year 1992 students at Ohio's public universities in spent some $1.3 billion on off-campus expenses such as housing, food, and Do individuals spend so much money on their transportation 2). (p. education because they expect that returns on their investment will benefit themselves and their families? Do they unquestioningly accept the worth of Do they ever think of any alternative investments? higher education? 4 Educational Output and Economic Stock 2 The facts and questions presented above may lead to the assumption to both individuals and society because that education important attracts is it so many people and both individuals and society are spending so much on it. is sometimes overlooked by parents Thet importance of education, however, who are facing rising tuition bills and by legislators who are looking for ways to cut spending on education when facing ever increasing demands. important to keep the enterprise of education going and perhaps, If is it to make it more prosperous, appropriate answers to the questions raised above need to be found. Answers need to be given to parents, employers, taxpayers, to the role that education plays legislators, and government leaders as daily in Evidence needs to be presented to activities and in economic development. show whether education has any impact on the economy. Economists and educators have spent much time and effort identifying the impact of education on economic development. Human capital theory has been used as a basis for the analysis of the relationship between education the economy. and theory, part of the variance According to human capital productivity in can be explained by the labor quality in terms of education and training received by the work force. Investment in education leads to higher productivity, and higher productivity, turn, causes higher earnings (Cohn & in Geske, 1990, p. 34). theory has helped economists and educators explain the Human capital the costs of education, and compute the economic residual, calculate returns Studies based on human capital theory have been carried out in to society. such areas as the relationship between school enrollment and the gross domestic product, relationship between educational expenditures and the and gross domestic product. the From their studies, economists and educators have found much evidence to show the impact of education on economic development. This study is intended to contribute evidence to literature on human capital the theory. The focus of this study is on the relationship between educational stock and economic output. Human Capital Theory What is the relationship between education and the economy? This not new today, and according to Woodhall (1987), the question was question is 5 4 and Economic Output Educational Stock 3 He believed that the question had a not new three decades ago either (p. 1). The systematic study of this question, he noted, however, much longer history. until the 1960s when a branch of economic theory called the did not start Woodhall listed such topics economics of education began to develop rapidly. the study of the economics of education as the contribution of education to in economic growth, the profitability of investment in education, the role of educated manpower in economic development, the costs of education, the finance of education, and the effects of education on the distribution of The concept of human capital, he pointed out, was income and wealth. "central to much of the research in the economics of education". The Human Capital Revolution 1971, and Woodhall, Many economists and educators (e.g., Wykstra, 1987) have agreed that the treatment of human beings as a capital component is by no means a novel idea. Woodhall (1987) quoted a message from T h e Wealth of Nations by Adam Smith (1776): "A man educated at the expense of be compared to one of those expensive much labor and time ... may Woodhall also noted that in 1924 the Russian economist machines" (p. 1). education and investment Strumilin "drew analogies between investment in in physical capital" (p. 1). While accepting the fact that the idea of the treatment of human beings a capital component came from the classical economists, many as the concept of human capital contemporary economists have pointed out that In his Human Capital, Becker (1993) was not applied seriously until the 1960s. 'revolution' began about that "what has been called the human capital said Wykstra (1971) argued that although the idea of three decades ago" (p. 15). the literature of the treatment of human beings as a capital component was in the classical economists, "the discipline of economics failed to incorporate the stream of economic thought" the human capital component into (p. fully "the prevailing tradition among economists remained that He noted that 2). of recognizing only the standard factors of production--labor and physical Cohn (1975) wrote that "while the importance of human capital" 3). (p. capital was recognized by most writers, few had come to accept human capital in the same sense that material capital was used" (p. 'wealth' 30). as Becker (1993) believed What initiated the human capital "revolution"? little of the mystery from it was the attempt of economists to "remove a that the economic and social world that we live in" (p. 25). Davis and Morrall 6 Economic Output Educational and Stock 4 (1974) identified the mystery as the mystery of the economic residual. They defined the economic residual as follows: to, economic growth usually Studies of the sources of, or contributions begin by trying to measure the effect on national income of increments The part of their quality and use. in resources and of improvements in statistically by national income that not "explained" an increase is in called the labor and physical capital "residual." 69) increments (p. is in contributed much "in that human capital Schultz (1971) stated solving the long-standing puzzle of the residual, where the rate of increase in outputs 161). He also pointed out that exceeds the rate of increase in inputs" (p. a much faster rate than human capital had grown in Western societies at national output had been large and that nonhuman capital, increases in He stated that "investment compared with man-hours and physical capital. probably, the major explanation for this difference" (p. in human capital is, 24). De Young (1989) wrote that "according to human capital theorists, the explanation of a large part of the residual variance in economic growth lay in the increasing skill base of workers within modern economies" (p. 123). 1960s have been broad Following the human capital "revolution" in the in human capital. publications on human capital and investment Weisbrod intangible form as well as (1971) pointed out that capital could exist in tangible form he meant factories and machines, By capital tangible form. in intangible form he meant the capital embodied in people--a and by capital in combination of labor and capital. this combination "human He called He argued that "studies of the sources of economic growth that have capital." stock of physical capital (plant and equipment) measured only changes in the have been incomplete; they have neglected the growing investment in human capital" (p. 70). Regarding the question of what kinds of investment are investments in human capital, many economists and educators have given similar answers. The forms that Becker (1993) in human capital as investments included listed a computer training course, expenditures on medical care, and schooling, He noted that lectures on the virtues of punctuality and honesty. these all forms of investment could improve health, raise earning, or add to a person's appreciation of literature over much of his or her lifetime. 7 Output Educational and Economic Stock 5 a form Schultz (1971) identified a unique characteristic of education (as He pointed out that education was more durable than of human investment). most other forms of human capital: "A high school education may serve the person over the rest of his life, and of this period, 40 years or more are likely to He also noted that education could be be in productive work" (p. 123). has a relatively longer durability: "The fact that augmented because of its it life means that a given gross investment adds more to the stock than the same gross investment typically adds to the stock of nonhuman capital" (p. 123). that education has played in the development of In analyzing the role economy, economists and educators have not only confirmed the function of lot of education in economic growth theoretically but also have done a empirical analyses. Empirical Analysis Based on Human Capital Theory A variety of approaches have been employed to test human capital the relationship analysis approach, the These approaches include theory. cost benefit approach. approach, and residual the analysis approach has mainly focused on comparing The relationship the incomes of individuals with different levels of education. According to DeYoung (1989), individuals with higher levels of education typically have higher status jobs, and the more education an individual receives, the higher his salaries and lifetime earnings tend to be. relationship between education and The residual approach analyzes the that cannot be explained statistically the economy by finding out the residuals Schultz (1961) compared the real by increment of labor and physical capital. He found a residual of 1929 with that in income of the United States in 1957. that could not be explained statistically by increments of billion dollars 71 value of the Then he compared the total labor and physical capital. 1930, and found an increase of 286 1957 with that educational stock in in Using three different estimates of the billion dollars during that period. return, he obtained three different estimates of the percentage of the residual that could be explained by the increase in His three the educational stock. That was, from 1929 to 1957 between estimates were 36, 44, and 70 percent. 36 and 70 percent of the increase in labor income could be explained by the the educational increase stock. in a Economic Output Educational and Stock 6 The cost benefit approach investigates relationship between the rate of return. education and the economy by calculating the internal Becker, 1993, and Psacharopoulos, 1981) have found that both Scholars (e.g., to investment in education, rates of return in most the private and social cases, are above the 10% common yardstick of the opportunity cost of capital. Using the 1940 and 1950 censuses, Becker (1993) derived the private and social rates of return to the 1939 cohort of urban, native white, male college 1949 cohort of white male college graduates. The private graduates and the rate of return was 14.5% to the 1939 cohort and 13% to the 1949 cohort. The social rate of return was 13% to the 1939 cohort and 12.5% to the 1949 cohort. a study on returns to education at the international level, In rates of return by Psacharopoulos (1981) presented private and social He found four patterns in the results of his educational level in 44 countries. or private) are the the returns to primary education (whether social (a) study: (b) the private returns are in excess of highest among all educational levels, rates of return to social returns, especially at the university level, all (c) investment in education are well above the 10% common yardstick of the opportunity cost of capital, and (d) to education the returns in developing in more advanced are higher relative to corresponding returns countries countries. Critique of the Human Capital Theory theory reveals that economists and of human capital The literature educators have confirmed the important role education plays that the in Some, however, have presented the limitations and economic development. weaknesses of the human capital theory. Merrett (1971) mentioned some minor difficulties calculating the rate in These difficulties include the measurement of student of return to education. opportunity costs, and the exclusion of expenditures on residential and consumption accommodation, research, activities estimate. cost from the a fact that education makes changes in While accepting individuals, as it Solmon (1987) raised the question of the extent to which the changes are the He argued that such factors as maturation and result of schooling. noneducational experiences may also contribute the changes. to 9 Economic Output Educational Stock and 7 Problem Statement and Research Questions The problem of this study was to investigate the strength of the stock and economic output. relationship between educational Educational stock was measured in terms of the percentage of state residents with different The gross state product (GSP) was used as the indicator of levels of education. output. economic Specifically, this study was intended to seek answers to the following questions by regressing GSP per capita on the percentage of state residents with levels of education. different Is there a statistically significant linear relationship, at the .05 level, A. between GSP per capita and the percentage of state residents with a high school is, how much of the variance in GSP per capita If there diploma and above? can be explained by the percentage of state residents with a high school diploma and above? Is there a statistically significant linear relationship, at the .05 level, B. between GSP per capita and the percentage of state residents with any level of is, how much of the variance in GSP per capita can If there higher education? be explained by the percentage of state residents with any level of higher education? Is there a statistically significant linear relationship, at the .05 level, C. between GSP per capita and the percentage of state residents with an associate If there is, how much of the variance in GSP per capita can degree and above? be explained by the percentage of state residents with an associate degree and above? Is there a statistically significant linear relationship, at the .05 level, D. between GSP per capita and the percentage of state residents with a bachelor's If there is, how much of the variance in GSP per capita can degree and above? be explained by the percentage of state residents with a bachelor's degree and above? at the .05 Is there a statistically significant linear relationship, level, E. between GSP per capita and the percentage of state residents with a graduate If there is, how much of the variance in GSP per capita or professional degree? can be explained by the percentage of state residents with a graduate or professional degree? 1 0