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.

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.

Chapter 9 discusses the arguments economists make about how the level and changes in the level of education in the labor force affect economic growth, including the basic human capital model with “externalities,” and the endogenous growth model, in which higher levels of education increase the capacity of the society to accumulate new knowledge, which, in turn, increases the rate of return to capital and contributes to higher rates of growth. The chapter also analyzes the important political economic discussions underlying the mechanisms through which higher levels or higher quality of education translate into higher rates of economic growth. One main point in these discussions is whether increased education or higher cognitive skills in the labor force is a key causal factor generating higher economic growth rates by raising labor productivity or the rate of innovation, hence promoting physical capital investment. Alternatively, physical capital investment may be correlated with education and skills in the labor force, but may itself be the driving force behind economic growth.

Chapter 14 reviews the economics and politics of public subsidies/provision of childcare and early childhood education (ECE). Underlying public provision of ECE are complex political issues of family “rights” in raising children and the age at which the State should intervene to “assure” that children are prepared for a productive role as adult citizens. The work of sociologists and economists on social class differences in children’s preparation for school has been part of this reconsideration of when in a child’s development public responsibility for education begins. The chapter presents economists’ case for public investment in ECE in terms of the social benefits to such investment and discusses studies that estimate the benefits, including whether ECE helps to close the socio-economic and race achievement gaps in schools. The chapter also reviews the US and international data on access to ECE, as well as studies that assess which types of ECE are more effective than others.

Chapter 5 analyzes how economists view the returns to human capital investments as age-earnings profiles, especially what such profiles tell us about how individuals invest in skills over their lifetimes and what this implies for the payoffs to such investments. The chapter also introduces the problem of comparability of individuals taking different levels of schooling and whether earnings differences of individuals with different levels of schooling be attributed to the investment in higher levels of educational attainment or rather to other factors, such as higher early academic ability or higher social class – hence better social networks – or the greater discipline or other unobservable attributes of individuals who attain higher levels of education compared to those with lower levels of schooling. Economists call this issue the identification problem. They grapple with it in trying to estimate how much of the differences in earnings for those with different levels of education result from additional skills acquired in school or are the result of other worker characteristics that may affect both level of education attained and earnings.

Chapter 25 describes the expansion and transformation of higher education internationally after World War II and particularly in the developing countries after 1995. The chapter delves into the many theories that attempt to explain this “massification” of access to colleges and universities, from a supply/demand explanation that focuses on the role of globalization and technological change (increasing rates of return to higher education) to ideological/State legitimation analyses. Analyzing such a large change is important, because first, there are competing theoretical explanations of these changes, and second, each explanation makes quite different assumptions about political power and how it is reflected in State action. The final part of the chapter focuses on a key concept that emerges from the discussion of the various theories of expansion and lays the groundwork for studying higher education financing; namely, higher education as a private and public good. It is the highly political nature of this concept, and how it varies across different societies, that infuses our discussion of higher education finance in the chapters that follow.

Chapter 24 discusses the debate on whether more spending on education increases student learning and other student outcomes, such as graduation rates (attainment). Most of the debate has centered on increases in spending for a given year of schooling and how much learning does or does not increase in each year of schooling with increases in spending per pupil. The chapter focuses on the spending-student achievement/attainment relation as a financial issue, and reviews the empirical arguments and counter-arguments (and the methodologies used to back them) for whether spending more per pupil – especially in districts and schools serving lower social class students – contributes significantly to student outcomes. After presenting the correlational (between more spending and higher achievement, usually using international comparison) arguments of impact of more spending that have, until recently, dominated the debate, the chapter reviews recent causal analyses in the United States, Israel, and Chile that evaluate exogenous increases in spending per pupil on lower-income students and show positive effects on achievement gains over time.

Chapter 17 describes the factors that determine the demand for and supply of teachers, including population growth, class size, the fact that teaching is a feminized profession, highly localized in terms of where individuals who become teachers choose to work, shortages and surpluses of teachers, costs of becoming a teacher, incentives to teach, and the effects of teacher education on both teacher quality and the supply of teachers. The chapter discusses working conditions in schools and the theory of compensating differentials – the reality that teaching conditions vary substantially among schools but that schools with poor working conditions may not be able to offset them with higher teacher salaries, with substantial implications for teacher quality in such schools. The chapter also reviews how teacher quality is defined in the empirical literature on teacher labor markets.

Chapter 8 reviews the major issues of “conditioned choice” and discrimination both in the provision of education and in labor markets. The chapter makes the case that if there are structural relations in society that “condition” individual behavior, access to information, and available likely options for investing in human capital, and if this “conditioning” varies among groups in society, the role of individual “free” choice in investing in academic and productive skills is much more limited, and we need very different explanations for the relationship of education to earnings. Structural limits on choice can come from various sources. Two important instances of such conditioned choice and its possible implications for labor market earnings differences are studied. The first regards gender differences in earnings, and the second, racial differences in earnings. The chapter reviews the arguments by some economists that both gender and race earnings gaps are the result of productivity differences between males and females and Black and White workers, and of other arguments that they are largely the result of discriminatory practices.

Chapter 28 reviews in detail how economists study the supply and demand for academic labor, presents a model of the factors that enter into academic salaries, and – because academic labor markets differ considerably across countries and these differences produce very different conditions in the way academic staff are hired and promoted – the review includes international aspects of faculty labor markets. The chapter also reviews studies that attempt to explain the factors that predict academic salaries in the United States, notably research productivity and teaching, the relation of those salaries to types of higher education institutions, and gender differences in academic pay, both in the United States and internationally. The chapter then analyzes various types of student admission systems across countries, including economic models of the higher education market for high- and low-ability students, and how students make choices among higher education institutions. The chapter ends with a discussion of affirmative action in the United States and the major affirmative action programs in India and Brazil.