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Table of Contents

I. Introduction and Background

Opening Story The US Educational Attainment Gap

1.1 Defining the Economics of Education

What is Education?

What is Economics?

1.2 Studying the Economics of Education

Scientific Method and the Economics of Education

Questions for the Economics of Education

Markets in Education

1.3 What Can Economics Teach Us About Education Policies?

The Different Types of Education Policies

Policies as a Set of Incentives

1.4 The Road Ahead: Objectives and Organization of the Book

1.5 Conclusion

Highlights

Problems

Opening Story The Education of Benjamin Franklin

2.1 Defining Education Markets

The Levels of Education in the United States

DEEP DIVE: International Schooling Comparisons

Providers in Education Markets

Arguments for the Role of Government and Nonprofits in Education

2.2 The Roles of Government in Education

Regulations and Mandates in Education

Public Funding for Education

2.3 Development of Education Institutions and Attainment in the United States

Mid-19^th Century: The Common School Movement

1910-1940: The High School Movement

1940-1975: Expansion at the Postsecondary Level

1975-Today: The Growth in Demand for Skill and the Shift to Market-Based Schooling Policies

2.4 Conclusion

Highlights

Problems

Opening Story Why Does College Enrollment Differ by Family Income?

3.1 Descriptive Evidence and the Distinction between Correlation and Causation

DEEP DIVE: Why is it Important to Distinguish Correlation from Causation?

3.2 Randomized Control Trials: The Experimental Ideal

3.3 Nonexperimental Methods

Regression Analysis

Policy Changes and Difference-in-Difference Estimates

Instrumental Variables

Regression Discontinuity: Examining Sharp Breaks

3.4 Conclusion

Highlights

Problems

Opening Story The Education Investment Decisions of Morgan and Stanley

4.1 What is Human Capital?

4.2 The Costs and Benefits of an Education

4.3 Basic Setup of the Human Capital Model

4.4 Present Value Formulation and Educational Investments

4.5 Predictions from the Investment Model of Education

Changes in Direct Costs

Changes in Indirect Costs

Changes in Benefits

4.6 Continuous Schooling Choices

4.7 Why Does Educational Attainment Differ Among Individuals?

People Differ in Their Ability to Finance Direct Costs

People Differ in the Benefits They Receive from Education

Policy Implications of Differences in Attainment

4.8 Conclusions and Questions for Empirical Work

Highlights

Problems

Opening Story How Would You Hire the Best Workers?

5.1 The Motivation for the Signaling Model

5.2 Setup of the Signaling Model

5.3 Signaling Model Equilibrium

Separating Equilibrium

Pooling Equilibrium

5.4 Signals and Indices

5.5 The Importance of Distinguishing Between the Human Capital and Signaling Models

The Private and Social Returns to Education

5.6 Empirical Evidence on Signaling Models

Distinguishing Between Human Capital and Signaling Models

Empirical Evidence

DEEP DIVE: Estimating the Labor Market Signaling Value of a GED

DEEP DIVE: Estimating the Labor Market Signaling Value of a High School Diploma

DEEP DIVE: Sheepskin Effects in the Returns to Education

5.7 Conclusion

Highlights

Problems

Opening Story Is Investing in Education "Worth It?"

6.1 The Difficulty of Estimating the Causal Effect of Education on Earnings

Selection When Ability is One-Dimensional

Selection When Ability is Multi-Dimensional

6.2 Empirical Evidence on the Returns to Educational Attainment

The Mincer Equation

Modern Approaches to Estimating the Private Returns to Schooling

DEEP DIVE: Estimating the Returns to Education Using Data on Identical Twins

DEEP DIVE: Estimating the Returns to Education Using "Random" Variation in Education from Quarter of Birth

6.3 Empirical Evidence on the Social Returns to Educational Attainment

Defining College Quality

6.4 Empirical Evidence on the Private Returns to Education Quality

Defining College Quality

DEEP DIVE: The Returns to Two- and Four-Year Colleges

DEEP DIVE: Estimating the Return to College Quality Using a Regression Discontinuity Design

6.5 Conclusion

Highlights

Problems

Opening Story Knowledge Production Versus the Production of Computers

7.1 Microeconomics of Production Functions

The Production Function

Choosing Input Levels

DEEP DIVE: Technology in the Classroom: Changing Input Prices and Education Production

The Education Production Function with Many Inputs

7.2 Implications for Education Policy

Different Types of Education Policies

Theoretical Arguments for Different Education Policies

7.3 Challenges to Estimating Education Production Functions

Measuring Inputs

Measuring Outputs

Specifying the Production Process

Choosing the Unit of Analysis

7.4 Conclusion

Highlights

Problems

Opening Story Serrano v. Priest

8.1 School Financing in the United States: Trends and Levels

DEEP DIVE: The Political Economy of Common Core Standards

8.2 Local School Choice: "Voting with your Feet"

The Free Rider Problem

The Tiebout Model

Challenges for the Tiebout Model

Empirical Evidence on Tiebout Sorting

8.3 The School Finance Reform Movement

Local Versus Centralized Financing

Judicial Action and Legislative Response

8.4 Forms of School Finance Centralization and Aid

The Community Budget Constraint

Block and Matching Grants

Actual State Aid Formulas

Paying for School Finance Equalization

DEEP DIVE: "Robin Hood and His not so Merry Plan"

School Finance Reform in Practice

8.5 Conclusion

Highlights

Problems

Opening Story The Coleman Report

9.1 The "Hanushek Critique"

The Relationship Between Total Resource Policies and Outcomes

DEEP DIVE: The Relationship Between State Spending and Student Test Scores

Explanations for Small Total Resource Effects

Measurement Problems in Capturing Resource Effects

DEEP DIVE: The Effects of Education Resources on Long-run Outcomes

DEEP DIVE: The Effect of School Finance Reforms on Educational Outcomes

9.2 The Effect of Class Size Reduction Policies

Project STAR

DEEP DIVE: The Difficulty of Running a Social Experiment

DEEP DIVE: Long-Run Class Size Effects

Non-experimental Class Size Studies

Evidence from Policy Variation

DEEP DIVE: The California Class Size Reduction Policy

9.3 Teacher Quality

Value-Added and the Measurement of Teacher Quality

DEEP DIVE: Nonexperimental and Simulation Evidence on the Validity of Value-Added Models

How Much Does Teacher Quality Matter?

The Relationship Between Teacher Quality and Teacher Characteristics

9.4 Conclusion

Opening Story The Founding of KIPP Schools

10.1 Economic Theory of School Choice

Matching Student Demand and Local Public Schools

Introducing School Choice Mechanisms

The Supply Side of the Market and School Choice

10.2 School Choice Policies

Charter Schools

Open Enrollment

Magnet Schools

Homeschooling

10.3. Effects of School Choice Policies on Student Outcomes

The Role of Selection in School Choice Studies

DEEP DIVE: The Harlem Children’s Zone

DEEP DIVE: Parental Information about School Quality and Open Enrollment Policies

10.4 The Effect of School Choice Policies on Competition and Traditional Public Schools

Empirical Challenges

Evidence on How School Choice Policies Affect Competition and Traditional Public Schools

10.5 Conclusion

Opening Story The Rise of Test-Based Accountability

11.1 Accountability: Measurement, Rewards and Punishment

What is Test-based Accountability?

School Accountability in the United States

DEEP DIVE: The Design of No Child Left Behind

11.2 School Accountability Measures

11.3 Do School Accountability Policies Change Student Performance?

The Effect of School Accountability Policies on Student Achievement

DEEP DIVE: The Effect of the Florida Accountability System on Student Achievement

Effects on the Distribution of Student Achievement

Explaining Achievement Effects: School Responses to Accountability Pressure

DEEP DIVE: How Schools and Teachers Respond to Accountability Pressure

"Unintended" Effects: Evidence of Gaming and Cheating

11.4 Do Student Accountability Policies Change Student Performance?

11.5 Conclusion

Highlights

Problems

Opening Story Classrooms without Teachers: The Teacher "Shortage" Problem

12.1 Supply and Demand in Teacher Labor Markets

Teacher Supply, Demand and Wage Schedules

Compensating Differentials

12.2 Who Becomes a Teacher (and Does it Matter)?

The Roy Model and Occupational Choice

Changes in the Composition of Teachers over Time

DEEP DIVE: The Link Between Teacher Wages and Student Outcomes

Teacher Mobility over the Career Cycle

12.3 Teachers Unions

What are Teachers Unions?

A Brief History of the Teacher Unionization and Collective Bargaining Movement

The Structure of Union Contracts

Evidence on the Effect of Unions on School Districts and Students

12.4 Teacher Incentive Pay

The Principal Agent Model

Different Forms of Teacher Merit Pay

Does Teacher Incentive Pay Affect Student Achievement?

12.5 Teacher Certification

DEEP DIVE: The Effect of Teach for America Teachers on Student Achievement

12.6 Conclusion

Highlights

Problems

13.1. What do Universities Do?

13.2. The Structure of Higher Education in the United States

13.3. The Financing of Higher Education

13.4. Conclusion

14.1. Why is Financial Aid Necessary?

14.2. The Structure of Financial Aid in the US

14.3. The Effect of Financial Aid on Behavior

14.4. Student Debt

14.5. Conclusion

15.1. The Economics of College Choice

15.2. Beyond Admission: Outcomes in the Collegiate Years

15.3. College Completion

15.4. Conclusion

1. Large, Nationally-representative Government Surveys

a. Current Population Survey (CPS)

b. US Census and American Community Surveys

2. Longitudinal, Individual-level Datasets

a. National Longitudinal Study of 1972 (NLS72)

b. High School and Beyond (HS&B)

c. National Education Longitudinal Study of 1988 (NELS:88)

d. Educational Longitudinal Study of 2002 (ELS:2002)

e. Early Childhood Longitudinal Study, Kindergarten Class of 1998-99 (ECLS-K)

f. National Longitudinal Survey of Youth 1979 and 1997 (NLSY79, NLSY97)

g. Panel Study of Income Dynamics (PSID)

3. State Administrative Data Sets

a. Texas

b. North Carolina

c. Florida

4. Institutional-Level Data from the Department of Education

a. Integrated Postsecondary Education Data System (IPEDS)

b. Common Core of Data (CCD)

5. National Assessment of Education Progress (NAEP)

Index

Authors

Michael Lovenheim

Michael Lovenheim is an Associate Professor in the Department of Policy Analysis and Management at Cornell University and is a Faculty Research Fellow at the National Bureau of Economic Research in the Economics of Education and Public Economics working groups. He joined the Cornell faculty in 2009 after receiving his BA in Economics from Amherst College in 2000 and his PhD in Economics from the University of Michigan in 2007. From 2007 to 2009, Professor Lovenheim was a Searle Freedom Trust Postdoctoral Fellow at the Stanford Institute for Economic Policy Research. He received both a Spencer Foundation Dissertation Fellowship in 2006 and a postdoctoral fellowship from the Spencer Foundation and the National Academy of Education in 2011. Professor Lovenheim’s research focuses on the economics of higher education as well as on teacher labor markets, and he has published widely in top economics, policy, and education journals. He currently sits on the editorial board of Journal of Human Resources and Demography and is a co-editor at Journal of Policy Analysis and Management.

Sarah E. Turner

Sarah Turner is a University Professor of Economics & Education and the Souder Family Professor at the University of Virginia, where she holds appointments in the Department of Economics, the Curry School of Education, and the Batten School of Leadership and Public Policy. She is also a Faculty Research Associate of the National Bureau of Economics Research. Turner received her PhD in economics from the University of Michigan and her undergraduate degree from Princeton University. Professor Turner’s research focuses on how students make choices about college going, the impact of financial aid, and the determinants of postsecondary degree attainment. Turner’s research also examines global education markets and the role of high-skill immigration in labor market outcomes. Turner is a co–principal investigator (with Caroline Hoxby) of the Expanding College Opportunities project, a randomized controlled trial that had a substantial impact on college choice for high-achieving low-income students. Professor Turner’s research has received funding from federal agencies and private foundations including the Institute for Education Sciences, the Bill & Melinda Gates Foundation, the Spencer Foundation, and the Smith Richardson Foundation.

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