Main driving forces of education expenditures

1. Main driving forces of education expenditures Torberg Falch Department of Economics Norwegian University of Science and Technology Trondheim, Norway

2. Overview of the presentation • Identifying determinants of - Expenditures in compulsory education - Enrolment in tertiary education - Public expenditures in tertiary education • Potential school reforms in the future with implications for public sector expenditures

3. Expenditures in compulsory education: Theory • Public sector decision-making - Median voter model - Bargaining within multi-party legislatures and with interest groups (trade unions) - Common pool problem - Fiscal illusion and the flypaper effect - Behaviour of schools and their cost function

4. Expenditures in compulsory education: Empirical evidence • Increased number of students increases expenditures (USA; Hoxby, 1996, Poterba, 1997, Harris et al., 2001; UK: Jackman and Papadachi, 1981, Johnes, 1993, Taylor and Bradley, 2000; Denmark: Heinesen, 2004; Norway: Borge and Rattsø, 1995, Falch and Rattsø, 1996, 1997, 1999a) • The effect of the number of students is inelastic; the elasticity seems to be in the range 0.6 – 1.0.

5. Increased income increases expenditures; education is a normal good (USA; Feldstein, 1975, Inman, 1979, Craig and Inman, 1982, Romer et al. 1992, Hoxby, 1996, Miller, 1996, Unnever et al., 2000, Harris et al., 2001; UK: Jackman and Papadachi, 1981; Denmark: Heinesen, 2004; Norway: Borge and Rattsø, 1995, Falch and Rattsø 1996, 1997, 1999a; Cross-country: Schultz, 1987, 1988) • In cross-section studies the income elasticity is in the range 0.3 – 0.7 • In time series studies and cross-country studies the income elasticity is in the range 1- 2

6. Other relevant factors (USA: Romer et al., 1992, Hoxby, 1996, Poterba, 1997, Flyer and Rosen, 1997, Miller, 1996, Harris et al., 2001; UK: Taylor and Bradley, 2000; Denmark: Heinesen, 2001; Norway: Borge and Rattsø, 1995, Falch and Rattsø, 1996, 1997, 1999a, Bonesrønning et al., 2004) - Share of disadvantaged students (+) - Tax price (-) - Share of elderly in the population (-) - Teacher unions (+) - Political structure, political strength (+) - Female labour force participation (+)

7. Decomposition model of school expenditures(Schultz, 1987, 1988, Falch and Rattsø, 1996, 1997, 1999a) • In Europe the teacher wage is often determined centrally • The decision-making on teacher input is usually decentralized • Likely that different factors influence the different components

8. Teacher wages • Positive income effect • Positive effect of the number of students • Positive effect of unions • Effects of the state of the labour market • References (USA: Craig and Inman, 1982, Luizer and Thornton, 1986, Currie, 1991, Walden and Newmark, 1995, Hoxby, 1996, Vedder and Hall, 2000, Walden and Sogutlu, 2001, Eberts et al, 2002; UK: Bee and Dolton, 1995, Dolton and Robson, 1996; Norway: Falch and Rattsø, 1996, 1997)

9. Teacher – student ratio • Positive income effect • Positive effect of the number of students • Positive effect of unions • Effects of the state of the labour market • Effects of “financial stress” • References (USA: Thornton, 1979, Craig and Inman, 1982, Currie, 1991, Hoxby, 1996, Figlio, 1997, Flyer and Rosen, 1997; Norway: Falch and Rattsø, 1996, 1997, 1999a; Cross-country: Schultz, 1987, 1988)

10. Non-wage spending per student • The component with highest growth during 1950 – 1990 in the US (Hanushek and Rivkin, 1997) • Positive income effects • Smaller effect of number of students than on teacher demand • References (USA: Craig and Inman, 1982, UK: Taylor and Bradley, 2000; Norway: Falch and Rattsø, 1996, 1999a)

11. Enrolment in compulsory education • Decisions on the number of years of compulsory education • Little existing evidence • Likely to depend on the assessed importance of education • Likely to depend on the “financial stress” in the public sector

12. Educational attainment • Demand for tertiary education determined by individual decision-making. • Standard theory for investment in human capital: Undertake more education as long as U(Ed) - U(Non-ed) > Costs If U = the wage W, this can be written • Optimal education time increases in the wage premium and unemployment, and decreases in the discount rate and study costs

13. Supply can be restricted by governments by deciding quotas in the universities. • Can individuals be denied university admission in a globalized educational market?

14. Determinants of educational attainment • Empirical work support the investment theory of human capital • The wage premium increases attainment (USA: Dellas and Sakellars, 2003; UK: Whitfield and Wilson, 1991, McVicar and Rice, 2001; Sweden: Fredriksson, 1997; Germany: Lauer, 2000) • More generous financial aid programs increases attainment (USA: Dynarski, 2002, Seftor and Turner, 2002, Long, 2003; Sweden: Fredriksson, 1997; Finland: Häkkinen and Uusitalo, 2003; Germany: Lauer, 2000) • Tuition decreases attainment • (USA: Survey of Leslie and Brinkman, 1987, indicates an elasticity of -0.6 – -0.8, Kane, 1994, Noorbakhsh and Culp, 2002) • The real interest rate decreases attainment • (USA: Dellas and Koubi, 2003)

15. Increased unemployment has positive effect (USA: Betts and McFarland,1995, Dellas and Sakellaris, 2003, Dellas and Koubi, 2003; UK: Whitfield and Wilson, 1991, McVicar and Rice, 2001; Finland: Häkkinen and Uusitalo, 2003; Spain: Fernández and Shioji, 2001; Germany: Lauer, 2000) • University enrolment constraints decrease educational attainment (Sweden: Öckert, 2002; Greece: Psacharopoulos and Papakonstantinou, 2004) • But, parental background seems to be more important than economic incentives (Kane, 1994, Haveman and Wolfe, 1995, Björklund and Jantti, 1997, Lauer, 2000, Fernández and Shioji, 2001, Pollak and Ginther, 2003) • What is most important for long term growth?

16. Public expenditures in tertiary education • Ehrenberg (2000). - Rapid increasing costs due to more competition and ”winner-take-all” society - Colleges and universities can be organized in more cost-effective ways. • Lowrey (2001). US state government funding seems to be negatively related to the share of elderly residents and positively related to tax income. • Rizzo (2003). Negative effect of increased spending on compulsory education • Goldin and Katz (1998). High correlation across US states in private enrolment over time

17. Potential educational reforms with implications for public sector expenditures • Compulsory education. Attempts to increase quality by accountability systems instead of increased spending?(Peterson and West, 2003) • Previous reforms of compulsory education in Norway determined by politic factors and not by economic factors(Falch and Rattsø, 1999b) • Tertiary education. Increased competition and private financing?(Johnes and Johnes, 1994, Johnstone, 2004)