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Is university education a good investment?


1. Costs and Benefits of Investment in education............................3
2. Evaluation of Efficiency of Investment in Education................4
3. Efficiency of My Investment in education and Current Situation in Russia..........................................................................................................5

Investment can be defined as decision for forego present income for expected future gain. Investment in human capital is an important determinant of individuals’ earning capacity and employment prospects. Consideration of possible benefits can influence the decision whether to go to university or to start to work after graduating from school.
In my essay I will review the key findings of economics on returns to investments in human capital. Firstly, I will consider the different benefits of education. Secondly, I will look at the ways in which investment costs and benefits of education investment can be drawn together to calculate rates of return of investments in education. Then I will try to evaluate whether my own investments in education are efficient and draw some conclusions.

Costs and Benefits of Investment in Education
The bulk of existing research finds that human capital accumulation through education and training provides employees with productivity-enhancing skills, and their wages and employment conditions typically reflect their increase in productivity.
Benefits. Basically, education can benefit individuals in three different ways.
Firstly, people are more likely to participate in the labour market. The higher an individual’s education level, the more likely it is that he or she will participate in the labour market. This effect is especially pronounced for women, whose participation rates are still comparatively low in many countries. In different studies it has been shown that participation rates for women with tertiary education tend to be higher than for women with lower qualifications, especially in countries where the overall female labour market participation is already low (such as less developed countries). High rates of inactivity can also be found among men with little formal education.
Secondly, education means that individuals are likely to experience less unemployment. In some cases the percentage of the least-educated men who are outside work at the prime of life is disturbingly high: at least 30 per cent of those aged 30-44 without upper secondary education are outside employment in Poland, the United States and the United Kingdom. Youth unemployment is also particularly high for individuals with less education, and some observers see a link with poverty, crime and other social problems that are generally not considered among the costs of not being educated. [1]
Finally, higher skills mean that workers earn, on average, higher wages than those with lower skills. From an economic point of view this is an unsurprising result and has been substantiated by numerous studies. The recent research project PuRE3, funded by the European Commission, estimated the effects of schooling on wages for Europe. According to this project one additional year of education yields an 8% wage increase, on average, across 15 European countries. [2] Another study reported that women aged 30-44 years with higher education in the United Kingdom earn 110% more than women of the same age without upper secondary education. [3]
A variety of methods have been used to explore the education-earnings link. The most widely accepted method is called Mincerian returns. It relates individuals’ wages to the number of years they spent in education. Under this approach the measured impact of schooling is the average increase in wages accruing to an individual as a result of one additional year of education.
It is important to note that the returns to education obtained with this method are simply a marginal wage benefit of one additional year of education. However, this approach ignores any costs of education incurred by the individual, for example fees, travel costs, and earnings foregone during the time spent in education. When considering the return of one additional year of education, an individual needs to consider whether the stream of discounted benefits outweighs the stream of discounted investment costs. In other words, the individual will need to estimate the internal rate of return. [4]
Costs. In general, the costs of education include any amounts of money that would have to be paid by the students. In detail, private costs include:
• education fees (net of Government subsidies);
• costs of housing due to education, etc.;
• ancillary education costs (transport, books, etc);
• foregone annual labour market earnings during the individual’s period of study.
The costs are estimated for the time an individual will take to complete each degree.

Part II. Evaluation of Efficiency of Investment in Education.
Now we see that this widespread recognition of the benefits of education does not mean that investment in human capital should be undertaken indiscriminately. Net benefits arising from education in opposition to costs should be estimated.
The internal rate of return is an accounting method that permits a comparison of returns across different assets. The marginal effects of education on earnings can be used to estimate the benefits of undertaking education. The stream of investment needed to achieve that education constitutes the costs.
To calculate the economic return, the discounted (a discounting factor is used to take account of the postponement of the benefits) cost of investments is examined alongside the discounted value of future benefits. The rate of return is the interest rate that makes the net present value of all cash flow (of benefits and costs) equal to zero (1). For an individual, the internal rate of return of education is the annual rate of return that his investment in education will yield. [5] The private rate of return influences the decision by individuals to undertake education.
The “private” return to education takes account only of privately borne costs (including foregone earnings while in education) and private gains in terms of higher post-tax earnings.
There exists now a great wealth of empirical literature on the returns to education.
The private rate of return is markedly more variable in comparison with social one (macroeconomic issue considering the influence of education on overall economic and social situation). For Europe, an average private rate of return is of 9.75%. Some estimates of social rates of return show that, on average, one additional year of education yields a global average rate of return of around 10%, which compares very favourably with alternative investments (for example, migration).
On returns specific to different types of studies, recent researches reported that private returns to tertiary education are highest for engineering, law and economics, and that average returns are higher for women at all levels. According to this study, graduates in arts, humanities and social sciences, achieve returns of only 3.6%.
De la Fuente and Ciccone (2002) propose that the main reason for high returns to investment in education is its complementarity with technology. They cite numerous studies that show how the premium paid for educated workers increases in times of rapid technological change.
Further, returns to primary education tend to be considerably larger in less developed countries: average returns are 25.4% for Sub-Saharan Africa compared to only 8.5% in European countries.
Finally, it has been observed private returns to higher education have continued to increase, largely because of public subsidies for the tertiary education sector.

Efficiency of My Investment in Education and Current Situation in Russia
Using the theory, now I can evaluate whether my investment in education is efficient or not. Let assume that I am driven only by monetary considerations in deciding whether or not to invest in a four-year university degree of Plekhanov Academy. I will have to contemplate and compare the costs and benefits associated with going to the Academy. The cost per year for tuition (90, 000 RUR) is the direct cost. We can add other costs such as for books and other study materials (let them be 1,500 RUR per year) to these direct costs. In addition, I incur an indirect (or opportunity) cost because I will not be able to work while attending university. This cost is approximated by what the average student with a secondary school diploma earns in the labor market, perhaps 180,000 RUR per year (15,000 RUR per month). Adjusted for taxation (13%), this cost will be 156,600 RUR.
On the benefits side, I can expect to be making, on average, approximately 300,000 RUR more than a secondary school graduate over his or her lifetime after graduating. After paying taxes, this annual benefit will be 261 000 RUR.
A rough way to summarize the above costs and benefits is to divide the annual benefit of 261,000 RUR by the lump-sum cost of 992,400 RUR, yielding a 26.3 percent rate of return on investment in education. The logic of this calculation is similar to that of buying a 992,400 RUR bond giving an annual coupon of 261,000 RUR. The yield of the bond is 26.3 percent.
If we apply less rough method and use the formula (1) to estimate the costs of education, we will get (we assume r = average interest rate in Moscow banks nowadays = 10 %):
PDV (costs) = (90 000 + 1 500 + 156 600) + 248100/(1+0.1) + 248100/(1+0.1)*2 + 248100/(1+0.1)*3 = 865 088 RUR.
Calculating benefits is more complicated because we do not know for how long I will be employed after the graduation, so I do not know the number of years m from this formula (1). But common sense shows that the benefits from the investment in education will be much greater than the costs of this education if I plan to work for a considerable amount of years.
So, my analysis has showed that my investment in education is efficient. It proves the results of recent researches concerning private rate of return of investment in education.
The situation with tertiary education is rather complicated nowadays in our country. Russia, as of 2007–2008 academic year has 8.1 million students enrolled in all forms of tertiary education. All Russian students are enrolled in 658 state-owned and 450 private civilian university-level institutions licensed by the Ministry of Education.
Population is eager to invest in its education, but it is not such an optimistic trend because it gives a stimulus to appearance of private institutions with doubtful educational standard. Moreover, the most demanded are faculties and specializations of economical, managerial, juridical orientations, and practically everybody can get the education of such kind for a very moderate fee. Many people prefer to attain high education of such kind instead of going to technical or other colleges. This influences badly on the balanced provision of labour force in Russia.
The number of state-owned institutions was rising steadily from 514 in 1990 to 655 in 2002 and remains nearly constant since 2002. The number of private institutions, first reported as 193 in 1995, continues to rise. Andrei Fursenko, Minister of Education, is campaigning for a reduction in number of institutions to weed out diploma mills and substandard colleges. This amount of universities does not exist anywhere else in the world; the most probable consequence is devaluation of education standard. That is why nation`s appreciation of tertiary sometimes can be a dangerous trend and thus, should be considered and coordinated by government.

In my essay I have considered the major issues and points of university education as a potential investment. I have analyzed both costs and benefits in connection to investment of such kind, their types and implications. After this, I considered the traditional Mincerian method of evaluating net benefits of education and the modern one concerning internal rate of return. Next, I looked through some current trends connecting to returns on education and saw that education is really a beneficial type of investment in human capital. I got added evidence for it with the help of the following calculations of my own costs and benefits and conclusion that studying in the academy is a very profitable and quickly repayable asset for me. In the end I reviewed the Russian trend of feverish higher education-attainment and the regulations government thereupon takes.

Endnotes Section
[1]. "The Returns to Various Types of Investment in Education and Training" completed by London Economics, 2005
[2]. De la Fuente, A. and Jimeno, J.F. (2004): "The private and fiscal returns to schooling and the effect of public policies on private incentives to invest in education: a general framework and some results for the EU", UFAE and IAEWorking Paper
[3]. OECD (1998): "Human Capital Investment: A Global Comparison". Centre for Educational Research and Innovation Report.
[4]. "The Returns to Various Types of Investment in Education and
Training" completed by London Economics, 2005
[5]. "The Returns to Various Types of Investment in Education and Training" completed by London Economics, 2005

1) "The Returns to Various Types of Investment in Education and Training" completed by London Economics, 2005
2) De la Fuente, A. and Jimeno, J.F. (2004): "The private and fiscal returns to schooling and the effect of public policies on private incentives to invest in education: a general framework and some results for the EU", UFAE and IAEWorking Paper
3) OECD (1998): "Human Capital Investment: A Global Comparison". Centre for Educational Research and Innovation Report.
4) OECD (2004): Education at a Glance - OECD Indicators 2004, Paris.
5) De la Fuente, A. and Ciccone, A. (2002): "Human capital in a global and knowledge-based economy". UFAE andlAE Working Paper
6) Harmon, C., Walker, I. and Westergaard, N. (2001): Education and Earnings in Europe: A Cross Country Analysis of the Returns to Education. Edward Elgar Publishing. UK.
7) Patrinos H.A. and Psacharopoulos G. (2002): "Returns to Investment in Education: A Further Update" The World Bank, Policy Research Working Paper Series
8) http ://en. wikipedia.org/wiki/Education_in_Russia

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