Education Finance Policy: Financing the Non-Market and Social Benefits

Human capital contributes to both labor market and non labor-market outcomes. In this paper, the non-market outcomes set the stage in a dynamic process for further earnings growth later. The scope of the non-market outcomes and the dynamic process are both poorly understood. Both become a source of market failure in human capital formation through education (and OJT). The research on private non-market and public social benefit outcomes of education is briefly summarized and compared to earnings outcomes. There is better awareness of the effect of education on earnings. But poor information about non-market outcomes is but one source of market failure. Another is the existence of social benefits that are externalities. Many of these are indirect (through intermediate variables) or benefit future generations. Both are benefits to others. Benefits from the education of prior generations tend to be taken for granted and do not affect investment decisions. It is concluded that the dynamic process reveals that education impacts are larger over 25-40 years than in shorter 5-10 year periods, a problem for myopic politicians and a possible source of under-investment. It is also concluded that inadequate information about the non-market outcomes (and not just capital market imperfections) is a source of market failure that, considering new estimates of narrow (market-only) and total (market-plus-non-market) social rates of return, also contributes to both private and public under-investment. The focus here is not about restructuring education but about the overall level of investment, and about the public/private shares in education financing, that are conducive to economic efficiency in serving both private needs and the public good.