Student performance and economic growth

The 2009 PISA test study (link) of students' proficiency in reading, mathematics and science is a highly successful method of evaluating student performance across countries. In fact, the creation of human capital is the main endogenous feature of the long-run economic growth since the quality of schooling and education system are essential to the creation of human capital. The difference in GDP per capita across countries is both intuitive, theoretical and empirical challenge to search for the causes of the gap between the economic performance of nations.

PISA test scores are aimed mainly at the evaluation of student knowledge at primary and secondary level in the fields of reading, mathematics and science. The assessment of knowledge in a particular field is subdivided into six different proficiency levels, ranging from 1 to 6. For instance, students at the 1st reading proficiency level are characterized by innate recognition of simple ideas reinforced in the text while students at the 6th reading proficiency level are characterized by a full capability of making multiple inferences, comparisons and contrasts and integrating the ideas presented in the text into a coherent conceptual framework of abstract ideas, sound evaluation and reflection. While 98.6 percent of OECD students can perform reading tasks at level 1, only 1.1 percent of students across OECD countries can perform reading tasks at the highest proficiency level. In addition, 28.4 percent of students in OECD countries exceeded the 4th (mid-range) reading proficiency level.

The reading scale has been further divided in reading continuous and non-continuous texts. However, the evidence suggest no systematic difference in reading scores between the two fields. Countries with the highest performance, measured as mean score, in reading rank are Korea (89.8 percent), Finland (89.3 percent) and Canada (87.3 percent). Countries with the largest student populations such as United States, United Kingdom and France were ranked in the upper-middle range while percent, and Israel (79 percent), Luxembourg (78.6 percent) and Austria (78.3 percent) are the lowest-ranking high-income countries on the reading scale in the 2009 PISA assessment. In the field of mathematics, 8 percent of students in OECD countries perform below level 1, 31.4 percent of students can perform mathematical tasks at 4th (mid-range) proficiency level while 3.1 percent of students perform at the highest proficiency level. In the country distribution, the percentage of students in the 6th proficiency level is the highest in Korea and Switzerland (8 percent), Japan, Belgium and New Zealand (5 percent). In a regional distribution, more than 25 percent of students in Shanghai perform at the highest level of mathematical proficiency. The proportion of students in the 6th proficiency level is very high in Singapore, Chinese Taipei and Hong Kong - 15.6 percent, 11.3 percent and 10.8 percent respectively. In addition, performance disparity in mathematics varied significantly across countries. Less than 1 percent of students in Mexico, Chile, Greece and Ireland reached 6th proficiency level A brief overview of the main empirical findings suggests a rather rigorous disparities in country ranking and performance.

The assessment of student performance in science is similar to the distribution of mean scores in the field of mathematics. About 5 percent of students perform below 1st proficiency level. In addition, only 29.4 percent of the students in OECD countries is proficient at 4th (mid-range) proficiency level in science while an average 1.1 percent of students in OECD countries can perform at the highest level of scientific literacy. In addition, the percentage of students below the lowest level of scientific proficiency is highly negatively correlated with country ranking since the proportion of students below the 1st level is the lowest in Finland (8.3 percent), Korea (6.3 percent), Estonia (8.3 percent) and Canada (9.6). Higher country ranking would thus indicate a lower proportion of students below the 1st proficiency level. All of the aforementioned countries ranked in the highest 10 percent of the distribution. If Shanghai, Hong Kong, Macao and Taipei were independent countries, their respective ranking in the field of scientific literacy would be in the top 10 percent of the distribution.

The empirical data on the distribution of mean scores in reading, mathematics and science are highly relevant to the measurement of human capital since the impact of mean scores on economic growth would differ to the certain extent from other measures of human capital. Recent attempts to capture the effect of human capital on economic growth were aimed at the definition of human capital as total years of primary, secondary and tertiary schooling. For instance, Robert Barro and Jong Wha Lee have collected disaggregated data on the total years of schooling for 146 countries between 1950 and 2005 at five-year intervals (link). The empirical evidence from the country panel suggests a strong linkage between schooling and long-run economic growth and institutional country features (link). In addition, Barro and Lee estimated the implicit return from an additional year of schooling ranging from 5 percent to 12 percent.

Gary Becker (link) and Richard Posner (link) recently discussed the 2009 PISA findings and the impact of cultural, genetic and demographic disparities on mean test scores in the United States. United States ranked in the middle of the mean score distribution. The rank of the United States (17th out of 79 countries) is above average in reading and average rank in mathematics (31st out of 79 countries) and science (23rd out of 79 countries). As Becker and Posner indicate, the relative performance of the United States should be evaluated with the consideration of cultural and demographic differences since the mean score of White and Asian students is significantly higher than the mean score of African American and Hispanic students. Disparities in mean scores between different demographic groups are typical in largely heterogenous populations. In Belgium, the regional disparity in mean scores between French and Flemish communities is even more striking. While the mean score in mathematics in 2006 in Flemish community had beenabove the OECD average, the mean score in mathematics of students in French community had been 18.56 points below the OECD average while the mean score of students in Flemish community had been 30 points above the OECD average. In 2009, such a relative difference would place French community in the rank of Italy, Portugal and Spain. On the other hand, student performance in Flemish-speaking community would reach the rank of Canada, Switzerland and Japan.

In the U.S, the demographic disparities in mean scores in reading, mathematics and science do not reflect the quality of the American education system. While the overall quality of the public and private American high school education system raised considerable concerns in previous performance of U.S. students in international mathematics and science ranking, the ranking of U.S. universities in science, mathematics and social sciences is the highest in the world. The output U.S. universities resulted in the highest number of Nobel laureates in physics, chemistry, medicine and economics as well as into cutting-edge accomplishments in R&D and technology. The emphasis on creativity and innovative thinking embodied in the American education system has enabled the United States to emerge as a world leader in technology, R&D, innovation and entrepreneurship.

The openness of the U.S. education system to international students, ideas and creative thinking could account for the remarkable achievements and academic quality of top American universities. On the other hand, poor teacher quality in American high school system is detrimental to the reading and quantitative literacy of American high school graduates, as a consequence of what Becker calls "teaching-to-the-test" syndrom where many public school teachers teach students topics not relevant to the command of knowledge but to the tests since test scores presumably determine teacher pay. Eric Hanushek of Hoover Institution recently found (link) that replacing bottom 5-8 percent of high school teachers with average teachers could near the United States on top of the international mathematics and science ranking. In addition, the measure is worth $100 trillion according to Hanushek (2010).

In the international perspective, student performance has been viewed as a significant determinant of the difference in cross-country economic performance. Recent paper by Atherton, Appleton and Bleaney (2010) found that higher mean test scores in mathematics, reading and science significantly improve per capita GDP. The authors showed that holding per capita income constant, average years of schooling is less important than mean test scores in predicting the economic growth. The 2009 PISA study highlighted the relationship between international test scores and economic growth. The evidence suggests almost non-existent correlation between reading performance and GDP per capita and cumulative education expenditure. The evidence simply suggests that socioeconomic variables matter more for reading performance than simple and often inconclusive aggregate indicators. In analysing the impact of various social and economic variables on reading performance, the results suggest a high correlation between parents' education and children's reading performance. For instance, 1 percentage point increase in the percentage of the population aged 35-44 with tertiary education returns 1.36 point increase in average reading performance where parents' education accounts for 44 percent of the variation in children's reading performance. The impact is shown in the following graph.

Parents' education and student reading performance

Source: OECD, PISA 2009.

A brief look also reveals another striking implication: cross-country reading performance is strongly affected by social and cultural status of the child's parents. A simple estimate of the relationship between reading performance and socio-economic status suggests that 1 percentage point increase in the share of students with very low social, cultural and economic status tends to decrease the average reading score by 1.13 points. Hence, social, economic and cultural status explains about 46 percent of the variation in student reading performance.

A considerable improvement of primary and secondary education system is vitally essential to the long-run economic growth. International test scores are an important method of evaluating international disparities in student performance and the subsequent impact on economic growth. Modern knowledge-driven economy requires not only intelligence, attentiveness but also comprehensive, integrated and developed social skills. Low reading, mathematics and science performance is generally attributed to student's low social, cultural and economic status. Genetic, cultural and socioeconomic variables, rather than education expenditure and GDP per capita, tend to play a major role in early childhood development as a basis of future student performance.

The economic and social future of countries requires considerable investment in children and student. Professor James Heckman of the University of Chicago brilliantly argued in Heckman equation (link) why the most gainful benefit of early childhood development is increased social productivity, greater motivation and developmental stimulation that every child needs. Our society should be not neglect an indisputable fact that early childhood development is a major determinant of student performance which sets the conditions for future advantage in school, college, career and life in general. Without these essential measures, student performance would suffer heavily from the spread of crime, teenage violence and high dropout rates.

The evidence from the 2009 PISA study suggests that higher quality of the education system is a necessary condition for higher test scores in reading, mathematics and science. As the evidence suggests, that the quality of human capital is strongly associated with higher standard of living. Without a prudent step towards improving developmental stimulation of students, considerably low student performance may seriously harm the prospects of future generations.

Human capital, labor market and economic growth

The OECD recently published the international comparison of the gap in employment rates between university graduates and workers with secondary education or less (link). There is no single exception to the fact that the employment rate is the highest in the group of individuals with college and university degree. Nonetheless, the comparison of the variation in employment rate in the cross section of OECD countries is very interesting.

Among the OECD countries (link), Iceland enjoys the highest employment rate (94.7 percent) of those with college or university degree followed by Switzerland (93.9 percent), Norway (92 percent) and Denmark (91.4 percent). The lowest employment rate for university graduates in 2008 was in Turkey (81.4 percent), Italy (86.5 percent), Israel (86.6 percent) and Greece (87.2 percent). In contrast, the employment rate for those below the secondary education is the lowest in Slovakia (39 percent), Hungary (47.5 percent), Poland (55 percent) and Czech Republic (57.4 percent).

The persistence of high unemployment rate for those below the secondary education degree is a broad outline of the findings from the course of labor economics. The human capital, defined as the stock of years of education per capita, is highly positively correlated with career earnings. The evolution of human capital across the countries has been a subject of debate on economic growth. The empirical study by Robert Barro and Jong-Wha Lee (link) has shown that, for instance, upper secondary school attendence by males has a significant long-term impact on the economic growth. The level of education, sustained by the years of schooling, is not a sole determinant of economic growth in the international perspective. Although, the economic growth is strongly positively correlated with the average years of schooling, the relationship is less powerful considering different parameters of the educational attainment. In the Barro-Lee dataset (link), there is a significant variation between the share of female population that enrolled in a tertiary education and the share of female that completed the tertiary degree. The difference is significant not only in the cross section but also in the country-based time series.

By far the highest tertiary degree completion rate for female has been present in Australia, Canada, Ireland, New Zealand and the United States. Among other countries, the completion rate of Iceland and the Netherlands has been significantly higher compared to the countries of the Continental and Mediterranean Europe. The rate of return to an additional year of schooling significantly differed across countries and across the level of education. For instance, Barro and Lee estimated that the rate of return is the highest at the tertiary level (17.9 percent per annum) compared to the secondary level (10 percent) while the rate of return from an additional year of schooling at the primary level is statistically insignificant from zero. The picture shows the regional variation in the average rate of return from an additional year of schooling.

Rate of return from an additional year of schooling across the world

Source: R. Barro & J.W Lee: Educational Attainment in the World, 1950-2010 (link)

The creation of human capital is essential to higher economic growth. Ultimately, the investment in human capital is the essential means of higher standard of living in poor countries. An interesting theoretical question is what could account for a divergence across the countries? Considering the relevant economic theory as well as scholarly contributions to the theory and empirics of economic growth, there are several factors that explain the significance of divergence in the rate of return from an additional year of education.

First, the impact of behavioral patterns on education and labor market decisions explains a pretty large part of the difference between the effect of education and labor market structure on the rate of return from schooling. Although the field of behavioral economics (link) is still a largely evolving discipline within the economics, the existing empirical studies of the effects of institutional variables on education outcome try to capture these effects by different proxies such as the estimates of political freedom, the rule of law and civil liberties. The changes in the return to education may be related to these factors since the relative worth of education in regions such as Sub-Saharan Africa and Latin America may incur high opportunity cost given the payoff from predatory behavior or working in the informal sector of the economy.

Second, general and firm-specific human capital investment, the increase in college premium and the enormous increase in female labor force participation help explain high rate of return from an additional year of schooling in advanced countries and East Asia. In particular, East Asian tigers were able to sustain high economic growth rates partly because of well-trained and educated labor force able to use the modern technologies. The resulting outcome of the Asian economic miracles has been a steady growth in output per worker and a gradual convergence of wage rates in South Korea and Japan to the level of U.S. According to Kevin Murphy and Finis Welch (link), the premium of getting a college education in the U.S in 1980s was 67 percent. The growth in college and university attendence rates is largely explained by the robust increase in tertiary education premium.

And third, greater labor force participation of women has also led to higher rates of college and university attendence. In spite the persistent male-female pay gap, women have experienced a tremendous increase in lifetime earnings as a consequence of higher rates of college and university attendence. The persistence of the male-female pay gap can be explained by the rewards to education rather than by inherent gender bias. The U.S. Census published the relevant data (link) on the distribution of female earnings. In 2003, the female earnings of high school graduates in the 25-34 age thresold represented 78 percent of average male earnings. The earnings of the same female age thresold with bachelor's degree represented 89 percent of male earnings and 71 percent for those female with master's degree. What accounts for the gender earnings gap across the levels of age and education is the asymmetric self-selection that led to dispersed gender distribution of relative earnings. Men usually self-select into the areas of work requiring a significant amount of risk-taking and rather uncertain payoffs while the female labor market pattern is inclined towards less risk-taking and greater certainty regarding the stability of lifetime earnings.

The data by the U.S. Bureau of Labor Statistics (link) published in 2003, showed that female-to-male earnings ratio in high-paying jobs is the lowest in the field of chief executives where female earnings represented 80 percent of average male earnings in the same field of occupation. On average, the female-to-male earnings ratio declined in low-paying occupations such as cashiers (93 percent), cooks (91 percent), food preparation (93 percent) and hand packaging (101 percent). Contrary to the popular perception, female earnings in the field of computer systems management and legal industry represented 91 percent of average male earnings while the highest ratio in high-paying occupations was recorded in pharmaceutical industry (92 percent).

Indeed, there is a persistent and historically lowest male-female earnings gap. But, as the labor economic theory of human capital predicts, the gender pay difference reflects different cognitive abilities and preferences of occupational selection considering the degree of risk-taking and payoff uncertainty. Even the international test scores (link) confirmed that advantage of female cognitive abilities comprehends in verbal reasoning and reading skills (link) while the cognitive abilities of male are more inclined towards the use of computer technology (link) and mathematics (link).

Even in a cross-country perspective, the gender wage differential persists. The gap, defined as the female-male ratio, ranges from 0.9 in France to 0.7 in Canada. The gender wage differential is a cross section of major economies is shown in the table below.

The Gender Earnings Gap Across Countries

Source: F.D Blau & L.M Kahn, Gender Differences in Pay, 2000

The set of different institutional characteristics of labor market in different countries could easily complement the productivity growth rates as to explain the evolution of wage differential across countries. Even though wage rates are primarily determined by the productivity growth, the existence of collective bargaining schemes and rigid labor market mechanism determining wage rate and total compensation can add significantly to the enforcement of particular labor market policies affecting gender bias in wage determination. In the United States and other advanced countries, the main cause of the wider gender earnings gap is a significant gap between college education premium and high school premium. In addition, reductions in personal income tax rates furthermore increase the rewards to college education relative to the education levels of high school or less - which, by the empirical evidence, seems to be the main determinant of earnings gap in the labor market of advanced countries.

EARNINGS AND EDUCATION: A SURVEY

In 2009, the median weekly earnings of workers with bachelor's degrees were $1,137. This amount is 1.8 times the average amount earned by those with only a high school diploma, and 2.5 times the earnings of high school dropouts (link).

SKILLED IMMIGRATION AND INNOVATION

A recent paper by Jennifer Hunt (link) finds that the increase in foreign-born graduates strongly contributes to the innovation in the United States:

"In this paper I have demonstrated the important boost to innovation per capita provided by skilled immigration to the United States in 1950-2000. A calculation of the effect of immigration in the 1990-2000 period puts the magnitudes of the effects in context.

The 1990-2000 increase from 2.2% to 3.5% in the share of the population composed of immigrant college graduates increased patenting by at least 81:3 = 10:4%, and perhaps by as much as 18%. The increase in the share of post-college immigrants from 0.9% to 1.6% increased patenting by at least 10.5% and perhaps by as much as 24%. The increase from 0.30% to 0.55% in the share of workers who are immigrant scientists and engineers increased patenting by at least 13% but probably by less than 23%.

While I find evidence for the crowding-out of natives in the short run, in the long run there is evidence for the reverse: that skilled natives are attracted to states or occupations with skilled immigrants. The results hint that skilled immigrants innovate more than their native counterparts, especially if they are scientists or engineers. If correct, the result could reflect higher education of immigrants within skill categories, or positive selection of immigrants in terms of ability to innovate. However, the effect of natives is not as well identified econometrically as the effect of immigrants."

Thanks to New Economist (link) for the pointer!

MINIMUM WAGE AND OBESITY

David O. Meltzer and Zhuo Chen explored the relationship between minimum wage rate in the U.S and body weight (link):

"Growing consumption of increasingly less expensive food, and especially “fast food”, has been cited as a potential cause of increasing rate of obesity in the United States over the past several decades. Because the real minimum wage in the United States has declined by as much as half over 1968-2007 and because minimum wage labor is a major contributor to the cost of food away from home we hypothesized that changes in the minimum wage would be associated with changes in bodyweight over this period. To examine this, we use data from the Behavioral Risk Factor Surveillance System from 1984-2006 to test whether variation in the real minimum wage was associated with changes in body mass index (BMI). We also examine whether this association varied by gender, education and income, and used quantile regression to test whether the association varied over the BMI distribution. We also estimate the fraction of the increase in BMI since 1970 attributable to minimum wage declines. We find that a $1 decrease in the real minimum wage was associated with a 0.06 increase in BMI. This relationship was significant across gender and income groups and largest among the highest percentiles of the BMI distribution. Real minimum wage decreases can explain 10% of the change in BMI since 1970. We conclude that the declining real minimum wage rates has contributed to the increasing rate of overweight and obesity in the United States. Studies to clarify the mechanism by which minimum wages may affect obesity might help determine appropriate policy responses."

THE COST OF FREE TIME

This is what I chased in NYT (link):

THE MOST EDUCATED TOWNS IN THE U.S

Here (link) is an interesting research conducted by Forbes. It is the list and specific charateristics of the most educated towns in the U.S.

GLAESER ON EDUCATION

Ed Glaeser of Harvard University provides a detailed insight on the importance of human capital for economic growth (link):

"Schools can also attract more talent with an environment that welcomes talented outsiders instead of erecting bureaucratic barriers that prevent their success. The literature on teacher certification finds few benefits from that hurdle. By contrast, Teach for America has achieved remarkable results by putting capable young people, often with little formal training as teachers, in classrooms. The experience illustrates that it isn't easy to assess teacher quality with standard teaching credentials. If attracting a wave of good people into teaching is the first step, the second step is keeping the best teachers and redirecting the rest. Performance in the classroom is the best way to know if a teacher is a success. Teacher promotion and tenure needs to be based on clear performance measures, including student test scores. Perhaps teachers unions could start endorsing the use of test scores to evaluate their members and determine tenure."

MY READING LIST IN THESE DAYS

In previous days, there has been much less blogging on my blog due to study course and a growing list of obligations regarding studying and reading the required material. In Friday, there will be more blogging as I've already picked the selected writing and analytical topics. Here is what I read in these days:

Paul A. Samuelson, William D. Nordhaus: Economics, 16th edition,
Douglas G. Baird, Robert H. Gertner, Randal C. Picker: Game Theory and the Law,
Gordon Tullock: The Rent-Seeking Society
Gordon Tullock: Virginia Political Economy,
Gordon Tullock: Bureaucracy,
Gordon Tullock: The Calculus of Consent,
Ludwig von Mises: Human Action,
Richard Posner: Economic Analysis of Law

FREE ONLINE ECONOMICS TEXTBOOKS

Here is a list of textbooks on economics availible online. The books contain a high degree of quality and valuable theoretical as well as analytical content in studying modern economics. Among the books there are Ariel Rubenstein's Lecture notes in Microeconomic theory, (2006), Robert Wilson's Short Course on Non-linear Pricing (1999), Introduction to Modern Economic Growth (2007) by Daron Acemoglu, Kenneth Train's Discrete Choice Models with Simulation and a lot of other books with content topics recommended to be studied in the course of macroeconomics and microeconomics nevertheless.

SWEDISH LESSONS ON SCHOOL CHOICE

Marek Hlavac, a visiting fellow at the Adam Smith Institute proposes that if British prime minister Gordon Brown really wants to enforce a legislation that would improve standards in the UK's quality-falling school system, then he should consider the Swedish-styled reform choice from 1992:

"Affluent parents can afford to send their children to a private school, or move into the catchment area of a good state school. The disadvantaged, however, often have no choice but to have their children assigned to a state school, often of low quality, by their Local Education Authority. The widespread application of the surplus places policy, furthermore, prevents good state schools from expanding and rules out the establishment of a new school, if there are spare places in an existing state school nearby. That's like the state banning a busy restaurant from laying extra tables because there are spare places in an unpopular one next-door – absurd."

Source: Marek Hlavac, A Lesson from Sweden (link)

In 1992, Swedish government, under the chairmanship of Carl Bildt, introduced voucher in the education system by allowing parents to send their children to any school they choose, whether it be municipal, independent or religious.

15 years after the implementation of education reform, the sector of the independent schools has grown rapidly (link). And the outcomes improved as well. For example, in 1992 Sweden spent $7,000 USD per pupil, while the outcome resulted in falling middling scores on international tests despite the fact that Sweden's spending per pupil was more than in any other country in the world.

Distorting inefficiencies of government-owned education system are perhaps the most powerful practical evidence of the inefficiency of monopoly structures in the market. Higher price at a fixed supply of education products combined with comparatively lower quality trippled by the lack of choice in satisfying consumer's utility of education surely evinces a measure-based indicatior of the inferiority of government-run education system.

The essence of education reform based on voucher-type financing is that a certain amount of money for covering the costs of education is not transfered to schools, but instead contributed to individuals while having a competition among schools, competing to attract new students through the channels of innovation, choice, perspective and a rock-bottom incentive to deliver the best quality under the lowest possible price - the way the competitive forces of supply and demand work in product markets.

In fact, education is a product purchased by the consumer (student) at a certain price compensated by the quality which a student receives after he pays the product price of education.

Imagine the world in which Ericsson would be the only supplier of cell phones and government the only supplier of networks. In the absence of competiton in this particular product market, Ericsson's quality of cell phone supply would starting falling while prices would grow constantly and customer satisfaction with Ericsson's cell phones would quickly start to shrink and the inefficiencies would occur tremendously.

The mechanics of the government-run education system is similar. The fact is that progressive education system embrace the generalized curriculum, disregarding the education based on outcome such as the competitiveness of the future graduates in the labor market. It often happens that the guidelines of knowledge supply in the state schools is not matched by the real world.

The answerable question of how to solve the inefficiency of government-run education is to let the enforcement of competitive forces in the education sector while giving students and parents the ability to choose where and how they want to invest in education which, as Benjamin Franklin once said, always pays the best interest.

Read also:

Ron Sunseri: The Swedish Model; The Failure of Progressive Education, Wall Street Journal, Tuesday, April 7, 1992 (link)

Friedrich August von Hayek: Intellectuals and Socialism, The University of Chicago Law Review, pp. 417-420, 421-423, 425-433, Spring 1949 (link)

Staffan Waldo: School Vouchers and Public School Productivity - The Case of the Swedish Large Scale Voucher Program, SIFAE, 23 March 2006 (link)

FCPP Publications: School Vouchers in Sweden (link)

Friderik Bergstrom, Mikael Sandstrom: School Choice Works! The Case of Sweden, Vol. 1, Issue 1, Milton and Rose Friedman Foundation, December 2002 (link)