FOR ASSESSMENT AND INTERNATIONAL COMPARISON
Policymakers in every country are confronted with two fundamental questions in considering whether to expand a particular level of education and the desirability and nature of public intervention. One important input in this consideration is whether expansion is economically attractive, given the labor market conditions and the marginal cost of expansion. The other is the consideration of market failure and how government policy can address it. The purpose of this annex is to address the first question, while the issue concerning market failure and the need for student financial assistance is discussed in Chapter 4.
There are two basic tools to assess the economic attractiveness of further investment (public and private) in higher education: (a) the rate-of-return analysis (or cost-benefit analysis) to estimate the economic returns to education for the individual and the society; and (b) the analysis of labor market outcomes of graduates to evaluate whether the supply has met the demand for skill requirements. These approaches and experience of countries are discussed below.
The underlying assumption of this analysis is that education enhances productivity of individuals. As a private investment, education incurs immediate direct cost in the forms of tuition fees, books, and transportation, and indirect costs (opportunity cost) in the form of forgone earnings to the family or the individual, and it yields benefits in the form of increased future earnings. Over the lifetime of individuals, the benefits of education generally outweigh costs, thereby providing positive rates of return to the investment.
This analysis estimates the internal rate of return to investment in education by equating the present value of costs to the present value of expected monetized benefits. To estimate the private rates of return to education, individuals' post-tax earnings are taken to calculate the private benefits (which are measured by the difference in the average earnings of graduates of one educational level and those of a lower level) and direct private cost and foregone earnings while in school are used to calculate the cost of schooling. To estimate the social rates of return, pretax earnings are used to calculate the social benefits, while public expenditure on education is added to private costs to calculate the total resource cost to society for investment in education (Psacharopoulos, various years).
Empirical studies in over 60 countries found that, worldwide, all levels of education are profitable for both the individual and the society. In countries that have not achieved universal primary education, the first level yields the highest social returns and the tertiary level yields the lowest, because both costs and the degree of pubic subsidy tends to increase markedly with the level of education. However, as a country's per capita income rises and the educational attainment