CHAPTER 2: BRIEF SURVEY OF LITERATURE
2.1. Brief review of the economics of education
2.1.1. Education research issues
2.1.1.1. LABOUR MARKET RELATED ISSUES
The sustenance of knowledge-driven economic growth requires education systems that impart higher-level skills to a greater share of the labour force. As such, education economists have placed a great deal of emphasis on determining competencies, outcomes, profitability, and return on educational investment and the creation of human capital (Schultz, 2010; World Bank, 2006; Psacharopoulos and Patrinos, 2002).
Schultz (2010) examined human resources competencies at a merged HEI. Education and the labour market are interlinked at both micro- and macro-economic levels.
At the micro-economic level, the economics of education relates to the labour market, as education is considered a primary determinant of earnings or wages. The demand for education (from early childhood development to higher education) is included in most estimates of earnings or wages. Existing studies hypothesize that earnings or wages drive the demand for education, since a higher education degree confers a stream of substantial advantages on graduates in comparison to non-graduates (World Bank, 2006).
Studies that have estimated the rates of return to investments in education reveal how much of an effect each additional year of education has on individual’s earnings or wages. Labour market related issues in education bring together the costs of education with the future benefits on the labour markets and this constitutes the core concept of human capital theory (Psacharopoulos and Patrinos, 2002).
At the macro-economic level, education and the labour market are also interlinked. For example, aggregating the effects that education has on individuals in the labour market, education may have macro- economic effects and raise economic growth in a typical country (World Bank, 2006). More broadly, education economists are interested in analyzing the ripple effects of education on earnings or wages, employment, economic growth and social equity. Human capital through education has been found to have strong and consistent positive effects on economic growth and productivity, and on cohesion and inequality within societies (World Bank, 2006; Wobmann, 2000).
30 2.1.1.2. BEHAVIOURAL AND DEMAND THEORY RELATED ISSUES
Education economists have placed a great deal of emphasis on studying how education changes behaviour and alters information sets by analyzing both: (1) what determines or creates education, and (2) what impact education has on individuals, societies, and the economies in which they live (Schultz, 2010; Teddlie and Sammons, 2010; De Lange and Olivier, 2008; George and Jones, 2007; Chalton, 2002; Hugh and Feldman, 1986). People are the basic building blocks of organizations and to understand the determinants of effective organizational performance, it is necessary to discover what determines the effectiveness of the performance of individuals (Schultz, 2010). The behavioural theory applies to individuals, households and communities, across all domains: at work, in consumption and during leisure, and in educational institutions (Teddlie and Sammons, 2010). However, whether any particular set of behaviours or actions constitute performance depends upon what the organization expects or demands of the person in terms of types of behaviours (De Lange and Olivier, 2008; George and Jones, 2007; Hugh and Feldman, 1986). There also human behaviours of highly effective organizations (Chalton, 2002).
2.1.1.3. EDUCATIONAL ORGANIZATIONS RELATED ISSUES
Education economists have placed a great deal of emphasis on identifying opportunities for improved efficiency, effectiveness, equity, and quality of education; and promoting effective education reform processes in educational organizations. Effectiveness and quality of educational institutions are products of people – faculty, administrators and support staff, students and stakeholders – who play differing roles in the pursuit of scholarship: teaching, learning and research, and in the discharge of these institutions’
expected functions (De Lange and Maharaj, 2010; Makgoba et al., 2010; Makgoba and Mubangizi, 2010;
Mubangizi and Bawa, 2010; Van Aswegen and Engelbrecht, 2009; George and Jones, 2007; Arnolds, 2005;
Taylor and Harris, 2004; McPherson, 1993).
The economics of education in this case encompass the study of educational organizations such as schools or universities, their objective, organizational structures and operations, cost and revenue functions, their technologies including the use of factor inputs which highlight the role of resource endowments in enhancing the quality of educational outcomes, and the determination of student achievement in the education process (Van Aswegen and Engelbrecht, 2009; George and Jones, 2007; Arnolds, 2005). Taylor and Harris (2004) examined the organizational changes which have the potential to make an educational
31 organization more efficient. Complementary organizational case studies are also used to explain the logic behind mergers of educational institutions, university models: College, Faculty, or School models, and to estimate economies of scale and scope and the optimal sizes of educational institutions (Makgoba et al., 2010). UKZN is a restructured university College model, with all the organizational structures and operations this entails (Makgoba and Mubangizi, 2010; Mubangizi and Bawa, 2010).
2.1.1.4. DEMAND FOR AND SUPPLY OF EDUCATION RELATED ISSUES: A MARKET ANALYSIS IN ECONOMICS OF EDUCATION
The efficiency, equity, structures, and exchange mechanisms of the market for education merits attention (Rothschild and White, 1990). Studies on the demand for and supply of education have examined educational institutions’ behaviour in a typical market structure, as well as the conduct and performance of education providers. The equilibrium between the supply of and demand for education depends on how the market for education is constituted in a typical country: the market for education may be competitive, monopolistic, monopoly, and oligopolistic or cartelized (Steyn and Villier, 2005; Clotfelter and Rothschild, 1990; Rothschild and White, 1990; Melck, 1982).
Steyn and Villier (2005) maintain that the educational market is far from being a perfectly competitive one and that the products and types of programmes supplied are not homogeneous in relation to the content and the method of instruction, making HEIs act as in a monopolistic competition. Based on the market for education structure, education as a commodity may be traded either through fees or no-fees, loans or income-contingent loans, vouchers, or be allocated by fiat or the national students financial aid scheme (NSFAS).
Others assessed the mode of interaction of education suppliers with demanders for its efficiency. The market for education programmes and services is equilibrated through demand and supply, and the study of each of these may yield insights into agents’ behaviour (Clotfelter and Rothschild, 1990; Rothschild and White, 1990). On the demand side of the market for education, existing studies argue that to the extent that education is efficacious and the human capital model articulates how it could be, individuals will demand education. On the demand side, student enrolment, participation and effort levels have been investigated amongst others. These studies modelled this demand function for education by population cohorts, for qualification levels or for course/degree programmes (Tewari et al., 2008; Taylor and Harris, 2004). Of particular interest were how levels of public subsidy affect the demand for education and how capital
32 market constraints may preclude optimal education outcomes (Mubangizi, 2005). On the supply side of the market for education, many education providers are run by governments or subsidized, but they may still co-operate, collude or compete to provide education (Clotfelter and Rothschild, 1990; Rothschild and White, 1990). Existing studies, for example, maintain that the functioning of the labour market for academic staff members, specifically the supply of academic staff members, affects the quality of education in a central way.
On the price elasticity of demand for higher education, existing studies suggest that the demand is fairly inelastic but students from higher income groups are less sensitive to price changes than students coming from poorer communities. The reasons why the price elasticity of demand for higher education is relatively price inelastic include inter alia that (Melck, 1982: 122-125): (1) university fees are only a certain portion of a student’s total costs, and (2) the forgone income of students is much higher than the university fees they have to pay. Melck (1982: 103-105) cautions that the positive externalities of education may result in the undersupply and overpricing of education if its provision is left entirely to market forces. Steyn and Villier (2005) indicate that the price of higher education programmes does play an important role in influencing the length of time that students tend to stay at HEIs. In the South African context, in respect of the two studies above, the payment of state subsidies are seen as correcting for market failures.
2.1.1.5. ACCOUNTING RELATED ISSUES
Education has become an increasingly important activity within all economies. For an educated individual, from early child development to higher education, the accumulation of knowledge and skills spans a lifetime, absorbing substantial, scarce resources (Jonhson and Kuennen, 2004; Belfield, 2000). The scrutiny of resources such as public funded expenditures on education, student financial aid and loans, non-market time of potential workers, indirect (or private) costs of schooling, the opportunity costs of students’ time, etc; relevant to the accountancy profession, is becoming a significant education research area in which education economists are playing an important role (Taylor and Harris, 2004). For example the original data for input-output analysis of higher education finance in South Africa in the 1990s was done by a team from the Economics Department from the University of the Witwatersrand (author’s verbal discussion with Professor Charlotte Mbali of the Centre for Higher Education Studies (CHE), Howard College, UKZN).
The field of economics of education is becoming a tool to give insights to policymakers on how to hold managers of HEIs accountable for their level of achievement (Makgoba et al., 2010; Makgoba and
33 Mubangizi, 2010; OECD, 1997). Some questions that are specifically dealt with in this particular education research issue are, inter alia:
What is the relationship between government (public expenditure packages) and private expenditure on education?
How substitutable and relatively efficient are government and private expenditure at generating human capital?
2.1.2. ECONOMIC PRINCIPLES AND METHODS APPLIED IN EDUCATION