This post is a brief follow up to The education trap.
The original interest in the economics of education came about because, among other things, of work on the causes of growth that suggested that economic growth was faster than could be explained by simple factor of production analysis. Further analysis linked this to increased education increasing the productivity of both labour and capital.
At the same time, research attempted to measure individual returns from education, showing a significant correlation between greater education and higher income. In turn, this led to policies designed to make students pay for education; HECS is an example. Part of the personal return from education was captured by progressive taxation, part by fees that people paid now and in the future.
One of the difficulties in the evolving policy approaches lay in the presence of externalities, benefits from education to the nation that were not directly reflected in salaries.
It was in the national interest to invest in education if it provided national benefits. It was equitable that students should pay a proportion of the economic benefits they gained. But how to strike a balance between the two? Puts student costs too high and national benefits would suffer.
The problem of externalities carried over into training. It was in a firm's interest to have a well trained workforce. However, staff moved. A firm that invested in training bore the full costs, while other firms benefited from that training as staff moved. Under profit maximisation, the greatest returns came from low training expenditure instead recruiting those trained by others.
Economists call this the free rider problem. If all firms followed the same approach attempting to free ride all firms would suffer. Governments responded by trying to compel firms to invest in training, while still extracting a return from students.
Both the labour and education markets are highly imperfect. Both students and governments make judgements about the value of particular education and training that may or may not pay off. The lead times in education and training are such that short term ism nearly always fails.
One core objective of the 1980 Dawkin's reforms was to free up the education marketplace. Those reforms were driven by the narrow rigidities built into Australia's industrial system. An industrial relations and performance problem drove educational change. Sadly, the result was an increase in market rigidities with an ever increasing proliferation of rules.
One key and sad result is that the proportion of the labour marketplace requiring a formal ticket expanded. In turn, this distorted economic analysis because returns from education became increasingly based on barriers to entry.
If you limit the higher paid, and sometimes not so highly paid, areas of the economy to those with formal tickets, if you reduce the area of the economy occupied by those without tickets, if you then compare incomes of those with tickets to those without, you will get a result that shows a positive return from education. In fact, you are really measuring the return from the barriers to entry that you have created.
To my mind, Australia's education and training system has become a rigid mess that no longer delivers the desired benefits.