Chapter 23 covers issues of how government collects public revenues for education; how government spends these revenues on education (including decisions regarding how much to spend on each level of education); the issue of unequal public spending on education for different localities and groups, which has led to the concept of educational adequacy – the right to an “adequate” education; and the issue of who should be the decision-makers on spending the money – local organizations, or the central state bureaucracy. As established in Chapter 22, countries vary in the way they collect taxes for education, and if such collection is decentralized, may lead to highly unequal spending on education among school districts and regions. This chapter reviews the legal and political contestation of this inequality in the United States and other countries to establish horizontal (locational) and vertical (among social class, race, and ethnic groups in the same educational administrative unit) equity in such spending. The chapter also reviews the arguments pro and con the decentralization of control over educational spending, including empirical evidence on the effectiveness of decentralized educational management.

Chapter 22 addresses two important questions in the public financing of education. The first is how much money in the form of taxes should a society collect and spend on education (public effort) and what are the political and economic factors that affect the government’s ability to increase public spending on education. The discussion includes a review of the rationale for public spending on education because of “externalities” in the form of social benefits resulting from educational investments and the public good aspects of education. The second question is who is to pay for the education—this is primarily an issue of the kinds of taxes to be levied to raise revenue for providing educational services and the degree to which and the possible reasons why some countries choose to have more privately financed education. A closely related issue covered in the chapter is why in other countries, the public sector chooses to substantially subsidize private education, which, on its face, appears to be policy that shifts resources to middle and possibly higher income earners.

Chapter 26 analyzes the political economy of higher education finance from an international perspective. This analysis documents and explains the increasingly stratified nature of higher education institutions by social class and, often, by level of public financing per student. It discusses the possible economic rationale for such stratification and unequal public investment in different strata. It also analyzes why some countries’ governments assume a high fraction of the cost of higher education expansion and others make families and students bear most of the cost. This comparative international analysis suggests that politics play a very important role in defining how higher education is financed and how that financing is used to shape the higher education system. The chapter makes the case that the “public” function of higher education is highly contested politically because of its direct role in providing access to higher productivity jobs and higher earnings figured in discussions about the worldwide trend toward expanding higher education through private institutions (many, for profit), and, in some societies, through increasing the share of private tuition payments in the financing of public institutions.

Chapter 15 discusses the theories and empirical evidence behind the choices that societies make regarding the kind of knowledge schools should produce at the secondary level for different groups of students; namely, academic skills that prepare them to learn higher-order productive skills, or vocational skills that prepare them for productive employment. The chapter reviews the production of vocational education and training (VET) and its relation to labor markets in different national contexts, focusing on the German dual system versus the US VET model and discusses the results of studies in various countries that estimate the effectiveness of vocational versus academic education in different national political contexts. The analysis in the chapter includes assessing whether VET systems reduce or promote improved labor market outcomes and social mobility for lower social class students.

Chapter 27 analyzes how economists and other social scientists have approached estimating the outputs of higher education, and – to the limited extent possible given available research – estimated how various inputs are used to produce these outputs. The chapter reviews two distinct types of approaches: (1) those that correspond to the production function analysis presented in Chapters 11 and 12 – that is, attempts to estimate the factors that affect, in the case of knowledge transfer, the value added of achievement (or earnings) and, in the case of knowledge production, affect some measure of research output; and (2) those approaches that attempt to estimate cost functions in terms of various higher education outputs – that is, total cost as a function of teaching, research, and social services. The chapter assesses a number of studies in various countries that have attempted to measure student gains in achievement and earnings across programs of study. It also reviews several US studies of retention/graduation rates and research output, as well as a case study of varying production functions across higher education programs in Morocco.

Chapter 3 makes the case that education systems are almost universally situated in the public sector, and their role is profoundly shaped by economic and social power relations as reflected in the political structures of the nation-State. The chapter argues that the way power relations are reflected in the State provides the framework for a political theory of education The chapter lays out such a State theory and suggests how it helps explain the nature of conflicts over how much to spend on education, who gets the resources, and how they are used in schools. The theory further helps define the structure in which individuals from different social classes, races, ethnicities, and gender make decisions (exercise agency) regarding education. It also helps define the economic opportunities facing different groups and how the State in market economies defines educational norms, standards, and access to education. The chapter’s final sections discuss how economics of education debates – for example, on the efficiency of the public sector in providing education – are influenced by political ideology, and describe the politics of nation-States’ developing social capital to enhance the efficiency of education, often at the cost of individual rights.

Chapter 21 presents the case for market accountability in education. Market reforms in education are premised on the idea that public education systems run by large bureaucratic organizations and financed by tax revenues will not provide educational services efficiently because they do not face competition from equally subsidized alternative (private) suppliers. The chapter reviews the underlying theory behind this argument, and provides examples of systems that have implemented market accountability in the form of vouchers and charters, focusing on Chile and Milwaukee. It further analyzes evidence on whether, in practice, market accountability seems to work to produce the more efficient delivery of educational outcomes, either because private provision is more effective and efficient than public schooling or because competition for students between private and public schools increases effectiveness and efficiency of the entire education system. At the end of the chapter, we compare the overall evidence on improving student outcomes of State-driven accountability systems and market accountability systems.

As a continuation of the overall introduction to the book, Chapter 2 summarizes the main contributions of economics to understanding the role of education in society and to educational policy. The chapter details these contributions in three parts: (1) economists have demonstrated that education has an important economic dimension (that it has economic value), and they have inserted education policy near the center of the debate on economic development and material well-being; (2) they have formalized concrete models of student learning, both in and out of school, and have developed models of educational production, in which schools, districts, and states are economic decision units, allocating resources to produce educational outputs – and where incentives and resource allocation decisions affect the productivity of teachers and student learning, economists have been able to model a number of strategies that increase output and test them empirically; and (3) economists have also been at the forefront of applying new and increasingly sophisticated statistical techniques to estimate quantitatively the causal effects of various educational policies on student academic outcomes and adult economic and social outcomes.

Chapter 19 discusses the politics of teacher labor markets, including an analysis of the role of teachers’ unions and of two strategies to improve teacher quality – raising teacher salaries to recruit and retain “better” teachers versus raising the quality of teacher education and professional development. The discussion includes an analysis of local monopsony of local school districts in the market for teacher services and local monopolies of teacher unions, a discussion of the possible impact of teachers’ unions on student performance, as well as a comparison of how effective higher teacher salaries in the United States and elsewhere may impact the quality of teacher supply. The chapter concludes with a review of how teacher education programs do or do not influence the quality of teacher supply, and what the elements of good teacher professional development programs appear to be, according to recent empirical studies.

Chapter 16 discusses how labor markets are different from other markets we observe in the economy and how teacher labor markets may differ from labor markets in the private sector/other industries. The chapter makes the case that teachers are distinct from workers in other types of labor markets largely because of the nature of the industry in which they work and explores some of the theories that can contribute to understanding the complexities of this market. It reviews the principal–agent problem in educational production and the fact that teaching is a highly localized profession, with most teachers teaching close to where they grew up. Teaching is also largely a feminized profession dominated by public sector employment. In this context, the analysis in the chapter reviews studies showing that working conditions are important in differentiating teacher quality. The chapter also discusses how the teaching profession is different from others, focusing on who become teachers, where teachers decide to teach, the characteristics of teacher careers, teacher attrition, and the teacher reserve pool.

Chapter 4 reviews the underlying concepts of human capital theory, including a short introduction to the concepts of demand and supply and the relation between marginal productivity and wages. The first section of the chapter reviews the key assumptions of human capital theory – especially the importance of individual choice, the role of individuals’ initial endowments in making choices regarding investments in education and training, and the causal relation between individual skill acquisition and individual labor productivity. The second and third section of the chapter review some fundamental concepts of supply and demand and the relationship between productivity and wages – these sections are meant for students who have had little or no economics. The final section of the chapter discusses the fundamentals of the model of demand for and supply of human capital – first, in the early model of Becker and Chiswick (1966), followed by the more recent life-cycle investment model as described in Neal (2017). These conceptual foundations allow us to move on to more specific human capital analyses in the next two chapters.

Chapter 12 focuses on how economists model production functions for education production units and, using these models, estimate the effect various inputs have on student outcomes. The most common educational production models are single output (usually student academic performance as measured by test scores), multi-input, and use secondary data collected at the school/classroom/individual student levels to estimate model parameters. Since these are not experimental data, students are not randomly assigned to inputs, and the main methodological problem is to identify the causal impact of particular inputs on student outcomes. The chapter discusses the role of teachers in educational production functions, the methods economists have used to estimate the contribution of teachers to knowledge production, as well as some examples of models to estimate the causal effects of other inputs into the production process – specifically, computer-assisted learning in primary school, summer school and student retention in primary and middle school, and an increased time on core subject teaching through a longer school day.