Chapter 10 reviews the tenuous relation between the level and distribution of education and the distribution of income, beginning with early arguments about economic development and income distribution. The discussion turns to the human capital model of personal income distribution, then to whether the skills distribution predictive of income distribution is years of schooling or measures of knowledge in the labor force, then to more recent longitudinal analyses that include human capital variables. This review also assesses various empirical methodologies estimating the relationship of educational expansion and skills distribution to income distribution. The main division is between models that analyze the relationship across countries and those that analyze longitudinal data on changes over time within countries. The chapter analyzes the reasons why it has been difficult to show that even in highly educated countries, the earnings distribution does not necessarily compress as the distribution of years of schooling or skills compresses.

Chapter 13 provides a brief treatment of effectiveness-cost and benefit-cost analysis as it applies to school inputs and outputs. Cost-effectiveness analysis compares how much each intervention costs in order to produce the estimated increase in output, where increases in output from each of these different interventions is measured by the same output metric. The goal is to identify the inputs that produce the largest increases in output per unit cost. Cost-benefit analysis comes into play when the gains in output are measured on different outputs – for example, in one intervention, it might be measured as mathematics test score gain, and in another, it might be measured as increased growth mindset. Because the outputs are different, they need to be translated into a “common denominator.” This is usually the economic value of each of those educational outcomes as measured by increases in adult earnings.

In this chapter, we point out that private damage suits are not available to all victims of monopsonistic exploitation. In addition to the underpaid employees who have standing to sue, there are five groups that do not have standing: (1) employees who have been priced out of the market, (2) indirect suppliers of labor services, (3) umbrella employees, (4) suppliers of complementary inputs, and (5) buyers from the cartel.

Chapter 1 is the first of three chapters that introduce the book. It presents the main concepts used and makes the case for a political economy approach to studying education – one that combines economics of education with political theory. The chapter argues that typical economics of education analyses provide powerful tools to study education, but have analytical shortcomings – they generally assume that markets are competitve, that all economic actors are politically equal, and that, given similar information, they would make similar economic choices, no matter their position in the social structure. The chapter suggests that a political economy approach provides a deeper discussion of market imperfections and economic/political power – including how power relations influence individual choice and condition the identification and treatment of market imperfections – to more fully understand education as an institution and its role in society. The chapter ends by providing three examples of important policy issues in education that such an approach would be likely to address: the relationship between education and economic growth; gender discrimination in labor markets; and teacher shortages.

This chapter deals with agreements among rivals not to hire one another’s employees. These agreements are known as “no-poaching” agreements and have been found in a number of labor markets. There have been numerous instances of employers agreeing to refrain from hiring one another’s employees. This, of course, depresses the demand for these employees and thereby puts a lid on compensation. In this chapter, we review some prominent cases involving (1) hardware and software engineers, (2) digital animators, (3) medical school faculty, (4) physical therapists, and (5) professional athletes.

For the most part, the suits filed by the Department of Justice have been resolved. Many of the private suits filed by the antitrust victims have been settled, but some are still pending. The chapter also explores the enforcement policies of the antitrust agencies which are provided in the Antitrust Guidance for Human Resource Professionals. We will also provide an extended analysis of no-poaching agreements in professional sports.

The exercise of monopsony in labor markets is limited to one degree or another by public policy. Employer conduct aimed at creating monopsony power is governed by the Sherman Act of 1890, which forbids collusion among employers as well as competitively unreasonable conduct by a single employer.

This chapter discusses private suits and the prohibition of §1 and the sanctions for violations. Corporations are subject to fines while individuals may be fined and/or imprisoned. Section 1 forbids collusive restraints of trade. In the past, there was some confusion regarding the applicability of §1 to labor markets. These days are gone. The Department of Justice and Federal Trade Commission have issued their Antitrust Guidance for Human Resource Professionals in which the agencies make it crystal clear that they will pursue criminal convictions for collusion in labor markets. In addition to public sanctions, §4 of the Clayton Act provides a private right of action for antitrust victims.

Chapter 11 analyzes the main complexities underlying educational production, what these complexities imply for modeling the role of schooling in the overall knowledge production process, and the simplifying assumptions made to estimate the contribution of various inputs to school outputs. The complexities reviewed are, first, that in educational production, knowledge is produced jointly – in formal education settings such as schools and also in other settings, principally the family. What implications does this have for education as a social equalizer? The second complexity is that knowledge production requires not only factors of production using “technology” (such as a standard curriculum and teaching techniques) to transmit knowledge, but also the participation of those acquiring the knowledge – the students. The third is that the decision-making process over resource allocation even in the formal public education process in schools takes place at various “levels” of administration – state, district, schools, and classroom, making model specification difficult. The chapter also presents a typical optimization school-level decision-making analysis using two factors subject to budget constraints.

Chapter 20 reviews the various forms of state/public sector originated input-based and student outcome-based accountability systems, from inspector systems to raising standards to publishing school (or country) average test scores to invoking sanctions for schools that do not meet standards for student learning gains, as well as combinations of these various forms of quality control. After a brief review of input-based public “regulation” of education systems, the chapter discusses in detail student test-based accountability systems, including some specific early examples in US states of such systems and the evolution of US national accountability legislation from the 1990s until the Obama administration. The chapter also reviews the growing empirical evidence that such output-based systems significantly improve aggregate student performance. In addition, it critically analyzes the effort by international agencies, such as the OECD PISA program to use international testing to “shame” national educational policymakers into implementing educational reforms.

Chapter 6 introduces the concept of present value and of rate of return analysis as the major tools used by economists to measure returns to investment in human capital. To do this, the discussion introduces the costs of an educational investment and what these consist of, and brings these costs into an analysis of estimating the rate of return to education using two different methods – the “calculated rate” and the “Mincer rate,” including critiques of the Mincer rate. The chapter introduces the concept of social costs and social return, the “option value” of schooling, and further analyzes the problem of “selection bias” – how economists try to “identify” the present value or rate of return to the additional skills learned in school, distinguishing the returns to investing in these skills from other factors that influence the higher wages/earnings of those with more schooling. To illustrate this identification problem, a case study is presented of estimating the returns to education for identical twins with different attainment levels.

Mergers that involve issues of monopsony are addressed in this chapter. In some cases, a merger may be procompetitive or competitively neutral. In others, however, a merger may be anticompetitive and, therefore, should be barred. Horizontal mergers combine two (or more) firms that operate in the same output market. Since they employ similar workers, the merger may create monopsony power. Antitrust policy regarding horizontal mergers is provided by §7 of the Clayton Act and its judicial interpretation. Typically, the focus is on concentration in the output market, but there has been some recent recognition that a merger may have ill effects in the labor market. We examine this recent concern and provide some examples.

In this chapter, we turn our attention to labor unions and their role in providing countervailing power. Congress recognized the consequences of individual employees having to negotiate with large employers. For the most part, individual employees have no bargaining power and face all-or-nothing offers that reflect monopsony power. Consequently, Congress passed legislation that would permit employees to unionize and thereby create a labor monopoly. The idea was to level the playing field so workers could not be abused. This chapter provides a brief review of the statutes and the scope of the labor exemption.

The formation of a union converts a monopsony into a bilateral monopoly. The economic effects of a bilateral monopoly are generally positive. Employment and output expand. Thus, both employees and consumers are better off. We explain this analysis and illustrate it with reference to professional sports. This chapter also explores the antitrust conundrum arising from bilateral monopoly.

Part 3 (Chapters 7 and 8) reviews theories of labor markets and the relationship between education and earnings that disagree with at least some of the underlying premises of human capital theory. These theories introduce alternative conceptions of education’s role in worker productivity and earnings. Chapter 7 reviews theories that challenge the human capital assumption that there is a direct, causal link between the skills acquired in education and the productivity/wages of workers in jobs as determined through wage competition. This includes the major contributions of signaling theory, queuing theory, and internal labor market theory to understanding labor markets. All three of these alternatives to human capital theory share the assumption that the skills that individuals acquire through investing in education are not the principal reason that they are more or less productive and therefore earn higher or lower wages in the labor market, as claimed by human capital theory.