Teenage achievement and the house price bubble

The general economic context of where and when you grow up matters. Think, for example, of those raised during the Great Depression in the US or World War II in Europe who are likely to be very careful with their spending, never through anything away and finish their plates. In this regard, what should we expect from those reaching adulthood in the past years?



Daniel Cooper and María José Luengo-Prado study the impact on teenagers of the house price boom before the current crisis in the United States on educational outcomes. Using the Panel Study of Income Dynamics (PSID), they find that a 1% higher house price at age 17 leads to a 0.8% higher income as adult if the parents owned the home, 1.2% lower if they were tenants, after conditioning for socio-economic characteristics. These are big numbers. They can be justified by the observation that higher house prices allows more collateral to borrow for education. Indeed households with a below median non-housing wealth saw even a 1.6% boost in their child's future income. To explain the impact on tenants, I suppose one can explain it with higher tuition in reaction to larger loans, which tenants cannot afford as well.



The consequences from the recent house price crash are daunting in this context. And given that state are disengaging themselves from financing their public colleges, leading to even higher tuition, the outlook is even worse.

Should we encourage business ownership?

Politicians claim left and right that small business owners are critical to the success of an economy. They woo them with various tax credits and by turning a blind eye to their opportunities to hide income from taxation. Yet, politicians also rewards large companies with generous tax abatements, especially when the relocate or just promise not to move away. So, in the end, who should be encouraged. the small business owner or the big conglomerate? In part, this is a question about whether it is better to have many self-employed workers or many employed workers.

Mirjam van Praag and André van Stel address this question by trying to determine the optimal business ownership from a sample of 19 OECD countries over 26 years. They proceed by estimating a Cobb-Douglas production function augmented with a business ownership rate, its square, tertiary education, as well as interactions of the latter with the formers. This is not a production function that has an interpretation for factor shares, it is rather a test of some relationships in the data. And by the implied non-linearity, it allows to computed from the regression coefficients what the optimal business ownership rate would be. On average, it is 12.5%, which is definitely not high, and it declines over time.

Furthermore, van Praag and van Stel find that countries with a higher proportion of workers with tertiary education enjoy a lower optimal business ownership rate, converging towards 11% when everyone has a university education (no gravediggers?). The interpretation they offer is that better educated people run larger firms. As business owners are a minority in a developed economy anyway and only the top business owners really matter for economic performance, I am not quite convinced by this argument, but it is apparently supported by microeconomic evidence. I would have rather thought that a more educated workforce is more specialized, and under such circumstances it is more difficult to be a business owner. The only exception are start-ups, which then either fails or are gobbled up by a larger firm.

The military draft, mortality and education

The data sometimes work in mysterious ways and provide puzzling correlations that lead to interesting research questions. One such correlation is that exemption from military service leads to lower mortality later in life.

Piero Cipollone and Alfonso Rosolia find this while looking at a natural experiment following the 1981 earthquake in Southern Italy. Boys from the affected region were exempted from military service, and they were followed, along with non-exempted neighbors, to track their life and education. By concentrating on boys both sides close to the border of the exempt region, they find that those exempt ended up being more educated. I can easily believe that, as they were not spending some of their prime learning years hiding in bushes and peeling potatoes, and they were expecting a longer work life. But the exempt also have lower mortality. This is not due to a lower incidence of military accidents, it is rather linked to the higher school completion rates. In fact, the authors conclude that raising high school completion by 10 percentage points would lower mortality by one or two percentage points in the decade thereafter. That is impressive at that age.

Education for gifted students: all for nothing?

Not every kid progress at the same pace through school, this is why some occasionally need to repeat their grade. How to handle gifted children is more controversial. Should they be allowed to skip a grade? Should they be offered special classes? Or should they simply follow the normal stream at the risk of getting bored? A good argument for devoting additional resources to them is that they will likely be the future leaders and entrepreneurs, and those are deemed to be the engines of growth.

Sa Bui, Steven Craig and Scott Imberman study the issue in the United States. Interestingly, the US has been steering towards channeling additional funding towards lagging students through the "No child left behind" laws, ironically implemented by a Republican administration. Gifted programs suffered from this reallocation, and the question whether this had an impact on the outcomes of gifted children. Comparing fifth-graders who were the last eligible for a gifted student program to those how just missed out, Bui, Craig and Imberman hardly find a difference. The science outcomes are better when looking at a randomization experiment for eligibility to a gifted student magnet school. This may be due that in such schools, classes are at a higher level and teachers may be better (and parents may get more involved). However, students may be suffering from a lower class rank among their peers. So it may all come to a draw. There is no easy solution.

The marital college premium

There are a lot of good reasons to marry an educated partner. Among them is that his/her income is higher, and theory has consistently pointed to the fact that one's own returns to education should be higher. This is known as the supermodularity of the marriage return function: the second derivative of outcomes with respect to both education levels is positive. This implies that the return to education becomes even higher, as the couple's surplus increases even more due to the supermodularity. But how much?

Pierre-André Chiappori, Bernard Salanié and Yoram Weiss use an extract of the US Census to confirm that supermodularity is present is very significant manner. It varies by cohort, though, with in particular younger females seeing stronger returns than young males. This means that women have done better in three dimensions in recent decades: they closes a large part of the wage gap with men, they get a higher marital college premium and they marry better. All this compounds to remarkable progress for women, who also work more and get a larger share of the marital surplus.

On the value of liberal arts education

I find a recent opinion article on CNN by Michael Roth, the president of Wesleyan University, on the value of liberal arts education rather upsetting. I can understand that as the president of a liberal arts college he wants to defend this particular type of education. But his arguments ring particularly hollow, and I would have expected better from someone leading on of the best liberal arts colleges.

His selling points are the following. 1) A broadly-based education is better then professional or technical expertise. 2) Liberal arts develop critical thinking and creativity. 3) Focusing on science and engineering is a serious mistake. 4) Effective implementation of new technology requires social and economic understanding. 5) Scholarship in humanities increasingly requires scientists. 6) Flexibility is important on the job market.

I agree that an education can be too narrow. But the US liberal arts way of doing it is a waste. Undergraduate students spend less than two years worth in their chosen major, and most end up being functionally incompetent in their major as they graduate. I realize this is largely due to the fact that high schools failed to give them this broadly-based education as they water down requirements. But there has to be a better way. Send those who have not yet mastered the general education requirements to community colleges, for example.

If the US is the bastion of liberal arts, as Michael Roth claims, then he cannot claim it favors critical thinking. I am continually amazed how US students woefully lack in this regard, with few exceptions of course. They are not interested in what they are studying or the world outside. They are very passive and minimalist students. This is favored by the "anything goes" attitude that liberal arts favor.

The reason why the US is a world economic leader is that it has a scientific and technological edge, and that is has economic policies that provide good incentives, at least better than the rest of the world (and that Americans are obsessed with working). That edge is waning because other countries are catching up on the scientific and technological front and have already surpassed the US in several areas. Michael Roth apparently thinks it is wrong to try to keep that edge, and that one should focus more or social sciences, humanities and fine arts. He got the causation wrong. One can afford this when one is rich, but it does not make you rich.

I think he right on the fourth point. It is useless to engineer better crops if you cannot find a way for people to adopt them. But one does not need more liberal arts majors than scientists to achieve this. His fifth point actually shows liberal arts needs science, so science should not be discouraged.

I also agree with his sixth point. That is why one should have sufficient time to teach not just the recipes of a field, but also where they come from. This allows a student later to come up with new solutions to new problems. But the 3-4 semesters in a major do allow this. The result is that in fields where this is not sufficient students are not competent enough and end up with jobs outside their major and with low pay. Just look what pay is across majors. Liberal arts majors are consistently at the bottom, also due the fact that there are just too many of those students.

No, we should not encourage liberal arts education. This should be done in high school and community colleges. Let universities concentrate on the teaching of the core and produce truly competent professionals.

Entrepreneurs need an educated workforce

Entrepreneurship is the driver of growth and wealth, or at least an important driver. This is why so many initiatives are geared towards making life easier for entrepreneurs. And the champion in the US, with relatively little red tape, low taxes and especially very developed financial markets. One aspect that is much discussed right now is how low these taxes should be, especially as lowering them implies reducing some public benefits such as education. Is there a trade-off?

José María Millán, Emilio Congregado, Concepción Román, Mirjam van Praag and André van Stel use a panel dataset from several European countries to show that education matters for entrepreneurial performance, and it is not only the entrepreneur's own education, but also that of the workforce. An entrepreneur who cannot find appropriate workers or clients who are sophisticated enough for her products is not as successful. While the results are strong, I am a bit wary of using a short annual sample to tease anything out of education measures, but this is worth further investigation.

Who gains from public higher education?

The answer to this question seems rather obvious: those who get such education. Who loses? That is less obvious, and education has positive externalities on others.

Ana Balcão Reis says things are not that simple. First, we have to keep in mind that only few people are credit constrained when it comes to college tuition. Indeed, most of those who are do not make it that far in the first place. Second, those who benefit from public higher education are also those who pay the most taxes, thus the welfare benefit for them is ambiguous. To sort this out, the paper builds a model with different levels of education and agents differing by ability, human capital and the capacity of their parents to pay (which depends on their own human capital).

First think about the marginal agents, those who are the last one to go to public university. They would prefer not to have this option, that is, have only private universities and not pay the associated taxes. But because they have to pay them and college is now cheaper, they choose to get educated with little benefit. Those who do not go to college do not to pay taxes and would thus vote against public higher education. And the richest pay more in taxes than what they would pay in tuition. So all those left in favor of public universities are the not too rich who would go to college anyway. The question is whether they are a majority.

There is one important aspect missing in this analysis, though. Higher education has a positive externality on others: a more educated workforce raises everyone's productivity, and it makes it also easier to accumulate more human capital. This is only partially prices into wages, thus higher education needs some subsidies to reach efficient outcomes. Thus, a microeconomics analysis as performed here misses potentially important macroeconomic effects.

Should universities focus on teaching or research?

The UK is going through a rather traumatic reform of the finances of its higher education system. There is much debate, both public and among academics, on how much of the burden should be carried by the students and how. If we take as given that universities are funded by public grants, how to allocated them is still complex, in part due to the dual goals of universities: teaching and research. Research grants are now quality driven, while teaching grants are mostly quantity driven. Given that their is a budget constraint, either at the government or at the university level, any economist would tell you there is a trade-off and choices need to be made.

John Beath, Joanna Poyago-Theotoky and David Ulph discuss how universities choose whether to focus on research or teaching. Universities are funded according to a formula depending on the number of students taught, the number of academics and their research quality, which depends itself on the academic/student ratio, Every academic gets the same pay, and universities maximize an objective based on the quality-weighted volume of research and the quality adjusted number of students, where the quality of teaching is a consequence of the academic/student ratio.

It is clear there is not going to be a free lunch. A university cannot be good at both teaching and research. As one plays around with the funding formula, all sorts of equilibria can emerge. For example, if research is well rewarded and a minimum quality of research is required for it to be funded, a bifurcation occurs where a few universities concentrate on research and others on teaching. Which funding formula is best for society remains open, though.

The exploitation of adjunct faculty

I have discussed previously that the US higher education system is not sustainable. In particular the low teaching loads in many institutions will have to increase in light of funding issues, and/or faculty salaries will have to decrease. And many professors will have to realize that their research is simply not for it and they will have to concentrate on teaching.

In fact, such an evolution has already been unraveling for a few decades, in the form of the replacement of tenure tracks faculty by contract teachers that go by various titles like adjunct professor, professor in residence, etc. For example, the proportion of tenured and tenure-track faculty in the US went from 45% in 1975 to 24% now. The share of graduate students in teaching is stable at 20% and the slack is taken by part-time faculty, whose share went from 24% to 41%. This shows that there is now a two-class society in higher education: rather well-paid regular faculty with low teaching loads, and exploited contract faculty.

Why exploited? Because their pay is low, they get no benefits, their classes can be canceled anytime, and they ofter have to teach at several places simultaneously to make ends meet. Below is a video from one such contract worker describing the situation at Marist University. While this seems to be a rather extreme case, it is not that far off what is happening at other places.



How is this going to pan out in the long term? I maintain that there is going to be higher teaching loads and lower pay for everyone but in a few top research institutions. This could take some time, as the current privileged faculty first needs to be replaced by attrition.

Is homework worth the time?

I have never been sure whether I should be assigning homework in my classes. For one, they give additional work, from their formulation to their grading. Second, I am not sure of their effectiveness, in particular given that the students doing them are the ones that least need them. The same applies to extra credit problems. But before college, homeworks are routinely given to children who mostly have no choice but hand them in. Are homeworks worth the time spent on them? While my children certainly spend spend less time on them than I did at the same age (it only appears they spend more time, they are constantly distracted, see yesterday's rant on the Internet at the workplace...), do they really learn with them?

Ozkan Eren and Daniel Henderson use the National Educational Longitudinal Study to not only look at achievement in mathematics, as previous studies, but also in science, English and history. And it is only in mathematics that homework matters (positively). I am especially astonished that homework does not matter in English, as practice certainly improves ones writing (and I should obviously have done more homework). But my impression appears to be wrong.

Which are the most efficient universities?

University rankings are not particularly useful because they only measure the output and hardly the input. And if they measure the input, having more inputs is better. This means that rankings reflect size and resources, not how well resources are used, and how much students improve from when they started their studies. This implies that any university that does not have a medical school or an engineering school starts with a disadvantage. Internationally, university rankings have become very important, to the point that, for example, France is now reversing the splitting of its large universities in field specific institutions. The new monster universities, now again covering all fields, will rank much better thanks mostly to their sheer size.

To counteract all this, you need to measure the efficiency of universities. Thomas Bolli does this for 273 universities across the world by estimating a production possibilities frontier. Unfortunately, the sole measured input it full-time equivalents of staff, while possible outputs are FTE of undergraduate and graduate students, and citation numbers. But it is a start. Universities in Switzerland and Israel appear to be very efficient (and indeed they are small are generate a good amount of research) while those in the UK seem particularly inefficient. That should fan some flames in the debate on university financing there.

Peer effects in education

The reason parents try get their children in good schools is not because of the better teachers, it is because of the better class mates. If they are among stable, studious and ambitious students, they are expected to perform better in expected terms. (Of course there is also the tactic to send your kid to an inner-city school, where she outperforms the others and lands easy acceptances in colleges, with scholarships, if all goes right). But how much do these peer effects matter?

Eleonora Patacchini, Edoardo Rainone and Yves Zenou study the social networks of children in the AddHealth longitudinal survey and find that it is the very last years of high school that matter, but those years matter a lot as their impact is very persistent. Specifically, they observe that if a child's friends have the equivalent of two more completed high school educations, that child will get 3.5 months more education. But it would be good to know whether this dominates any effect from neighborhoods, which is taken into account but not reported.

Does it make sense to open new universities?

That question may not make sense in the US or the UK, or some other European countries that face very serious public budget constraints. It also does not make much sense given the peak in student attendance in many OECD countries. But where student numbers will keep increasing, it is a good question whether one should increase the size of universities or their numbers.

Berardino Cesi and Dimitri Paolini consider the question from the angle of the students' mobility constraints. Suppose students differ by ability and by location, and mobility is costly. A monopolistic university will only attract the ablest. Adding a new, local university is then welfare improving. Suppose now the mobility costs are rather low. Adding a second university is now welfare decreasing because of a peer effect. Indeed, high ability students now get pooled with low ability ones, and they suffer through adverse peer effects. And given that some students simply do not belong in a university, we are better off with fewer universities and fewer college students.

Publish school performance information!

Schools strongly resist the publication of their performance, officially because they have special circumstances that justify their ranking, and those circumstances get overlooked. However, as I reported before, evidence from the Netherlands showed that publishing school rankings forced the worst school to improve, and they do improve. But maybe the circumstances in the Netherlands are special.

Simon Burgess, Deborah Wilson and Jack Worth exploit a natural experiment in Britain: Wales suppressed the publication of school rankings in 2001, while England kept it. Using a difference-in-difference analysis, they show, oh surprise, that the performance of Welsh students regressed significantly, based on national exams. Only the top 25% schools escape this debacle. In addition, they find no indication of changes in stratification across schools in Wales, which invalidates further the argument that publishing rankings exacerbates school disparities through self-sorting of students. What is then a good argument for withholding school performance information?

Breastfeeding and cognitive skills

Breastfeeding is now almost universally promoted as the healthiest way to feed a baby. And indeed, while breastfed babies are a little smaller and than bottle-fed ones and gain a little less weight, they are healthier, it is thought mainly because the mother milk transmits antibodies and relevant nutrients. But not every mother breast feeds, maybe because not every mother realizes all the benefits, or because some of the costs are high (time management for working mothers or aesthetic issues). Or there are some other benefits that are not well known.

Maria Iacovou and Almudena Sevilla-Sanz report that breastfeeding has significant positive impacts on cognitive skills (reading, writing and mathematics). While this correlation is well known, it may be spurious because mothers who breastfeed are more likely to be well educated (Irish example), and their children are also more likely to be well educated as well. The obvious way to overcome this statistical issue, a randomized trial, is not feasible on ethical grounds. What Iacovou and Sevilla-Sanz do is use propensity score matching, which essentially matches babies that have the same characteristics but breastfeeding and then compare their cognitive skills. What is particularly impressive in this study is that the retained characteristics are very broad beyond baby demographics and health, including parent characteristics such as education, job, income, and even pre-birth attitude towards breastfeeding or home and neighborhood. And even after controlling for all these variables, the impact of breastfeeding is still significant on babies from Bristol (England), and it may even grow with age.

The international flow of doctorates

With globalization, the trade of goods has considerably increased. But the substitution to international trade, international migration has also increased. While the migration of low-skilled workers draws headlines, the most "globalized" are the high-skilled ones. In particular, those holding doctorates are very mobile and in particular they move frequently.

Laudeline Auriol has analyzed for the OECD the flow of doctorates across its members countries. For examples, across European countries, 15 to 30% of all doctorate holders has moved across a border over the last 10 years. This is a remarkable transformation for Europe, where language and cultural barriers were much much higher a few decades ago.

This high mobility reflects the particular labor market for doctorates. Positions and candidates are very specialized, thus often need to move far to fond a match. This is compounded by the large increase in new doctorates across the OECD: from 140'000 in 1998 to 200'000 in 2006. But this growth has been very uneven, low in Germany, France and the US, very high for some of the poorer OECD countries, and for women. Currently, the US has the most doctorates (340'000) with Germany not far behind, which explains why a professorship there requires a second doctorate (habilitation).

Unemployment rates are low, 2-3%, but it usually takes several years after graduation until a doctorate finds a stable job, and this after graduating at a much higher age than other workers. While this sort of indicates a healthy labor market, it hides considerable heterogeneity. Women and doctorates in humanities face much higher unemployment rates. The latter are much less mobile because their research (and teaching) topic is much more closely related to the local cultural context, and can thus not take advantage of international opportunities like, say. natural scientists. It is then not surprising that in some countries a fifth hold jobs that are not related to their doctorates. There is also considerable uncertainty about job security. For example, post-docs (which include temporary visiting positions) now outnumber full-time faculty at US academic institutions.

Coming back to international mobility, it is remarkable how in most counties over a fifth of doctorate holders are foreign born, over half in Canada. Half of the foreign born doctorates in the US are from Asia, and two-thirds of the graduate students as well. And in the countries that have lower proportions of foreign born considerable share has stayed abroad recently. A truly international workforce.

Football has an impact on college quality

US faculty members are currently quite frustrated with sports programs on their campuses as the swallow substantial budgets at the expenses of academics. Very very programs yield a profit, even (American) football is in deficit save for a handful of colleges. And coaches get salaries that are completely disproportionate to the academic mission of universities. Then why are universities willing to invest all this money in sports? The standard answer that this builds alumni loyalty cannot be good, as they typically donate to the athletic foundation, which is run independently from academic budgets. The only advantage, so to speak, are that they reduce the deficit that needs to be covered by academic funds. Another argument is that it attracts better students. I can believe that for some sports, where student athletes are better than the general student population. But there should be better ways to attract good students, like merit scholarships.

Sean Mulholland, Aleksandar Tomic and Samuel Sholander claim that even the football program improves the academic quality of the student body. It is not that the football player are academically gifted, they are certainly not, but it is all about attracting other students. Their assessment is not based on actual fact, but rather on peer evaluation of faculty and university administrators, as they are records in the US News and World Report college rankings. And the better a sports team is, also from peer evaluation by football coaches, the better is the academic reputation of the student body. Now that the rumors have been established, it would be good to back this up with facts...

On the consequences of slavery

I reported now long ago on the consequences of slavery in Africa, where it is shown that countries where more slaves were taken still have lower levels of development. It is quite amazing that this can have an impact on average income for so long. But what about the receiving end of the slave trade?

Graziella Bertocchi and Arcangelo Dimico look at county data for the US and find that current average incomes are not related to the inflow of slaves. However, income inequality is. Why would that be? It could be because slave could not own land, and this still has an impact today. Or it could be because of discrimination. Or it could be because of persistent differences in human capital.

Now using a panel data set, Bertocchi and Dimico find the last one is the most likely one. The education gap between blacks and whites has never recuperated, and segregation was certainly part of it. But this strongly persistent effect means that affirmative action still has a reason to be.

Marginal returns of education policies

It is well-known that the returns to education are high, higher than financial returns in fact. Especially for primary education, estimation of Mincer equations has yielded returns over 12% a year, returns that decline somewhat with additional years of education. These are personal returns, that is, how much one's wage increases with an additional year of education. This indicates that one should choose more education than less. From a policy point of view, it is, however, not clear that one should try to stretch as much as possible education. Indeed, higher education is more costly and its returns may differ by individual.

Pedro Carneiro, James Heckman and Edward Vytlacil address this heterogeneity by estimating returns from the National Longitudinal Survey of Youth of 1979. They are certainly not the first ones to do so with this dataset, but the innovation is in the use of instrumental variables. Indeed, they identify a serious shortcoming in interpreting the latent (Corr: local) average treatment effect because the people induced to go to school by a change in an instrument may not be the same that are induced to go to school by a given policy change. As a consequence, the returns for the two types of people can be quite different, and they are in this case. They improve the estimation technique by identifying what sections of an economically interpretable mean marginal benefit surface are identified by different instruments.

Carneiro, Heckman and Vytlacil conclude from their analysis that returns of higher education differ indeed from individual to individual, and in a way that is highly predictable by both the econometrician and the individual. In other words, people who sort themselves into higher education are those who have already experienced high returns and are likely to experience high ones in the future. This indicates that with current policies the right people go to higher education, and that encouraging more to go to college would not yield returns as high as for those who already go there.