The Economics of Education

Education continues to remain one of the biggest line item in the budget of every nation. This brings up the question, why do countries and their governments spend money on educating people. Is it a public good or a social good? Several economists have suggested that education should be completely privatized. However, governments all over the world refrain from doing so. This is because privatization would encourage profit-seeking mentality. This would lead to the exclusion of several people, particularly those belonging to the lower class, from the system.

On the other hand, there are many governments in the world that are using taxpayer money to fund at least a basic level of education for every person. In this article, we will try and understand the economics of education. We will understand how education impacts individuals as well as societies.

The Cost of Not Educating the Workforce

Before we talk about the costs of education, we need to first understand the real cost of not educating the workforce. Education is a tool that reduces poverty and brings down social inequality. This means that for a nation like America, education really is an investment. If the nation pays more money in educating its workforce today, tomorrow it does not have to pay out money in welfare payments and other entitlement programs. Education makes individuals self-sufficient.

In fact, once these individuals become educated, they become a part of the solution rather than being a part of the problem. Educated individuals are able to pay taxes. These taxes generate revenue for the government which can be used for the betterment of society. Also, educated individuals are usually not involved in crime. As a result, more education has a direct correlation with lower rates of incarceration. Fewer incarcerated people means that the state does not have to waste as much money on law enforcement and judicial costs.

This is the reason why spending billions of dollars of public money on educating the masses is justified. It is a win-win deal for everybody.

Primary and Secondary Education

Governments across the world spend huge sums of money trying to provide primary education to each and every individual. In many European nations, primary and secondary education is provided free of cost to every student. In America, the education provided is not free. However, the tuition fee is heavily subsidized. The American government spends over $600 billion or close to $12500 per student trying to educate young citizens.

However, there is a problem with government spending. It is a known fact that private schools provide a better education than public schools even if both are given the same amount of resources. This is because private schools know that their stakeholders are powerful. If the quality of education drops, the parents will simply take their kids to another school. Hence, there is an incentive to continuously increase the quality of education in order to stay competitive. On the other hand, public schools know that they are receiving grants from the government. They know that parents do not have much of an influence on how much funding they get. As a result, they are not particularly concerned about the opinion of the parents.

To solve this problem, the American government has started a system of school vouchers. This means that just like private schools, the funding of public schools can also be increased or decreased by parents. Instead of paying cash, the parents pay in vouchers which can later be exchanged for cash by giving it to the government. In theory, this voucher system has increased competition amongst the public schools. This is likely to increase the quality of education as well. However, there are several external factors like time and skill level of parents which also influence the results that students get on their tests. This is the reason why despite all the efforts taken by the government, the students from private schools continue to outperform students from public schools.

Higher Education

Higher education, on the other hand, is largely privatized in most countries of the world. In the United States, the average college tuition fee is about $27,000 and more than 70% of the students have to take a loan in order to be able to pay this fee. However, the government provides credit to students without any income documents. This is both good as well as bad. If these loans are not used responsibly, they can end up indebting the students for a long time.

However, students still want to pursue a college education. Also, students that are college educated tend to earn significantly more than their high school counterparts. This may be because of the following reasons:

  • Skills: College graduates tend to have more skills than high school graduates. As a result, the employers are willing to pay more for a more productive employee.
  • Signaling: The mere fact that a student has gone to college signals to the employer that they are willing to learn and develop more skills. This also causes the employers to pay a premium in order to be able to bag a good resource.


Several researchers have concluded that college is not the only way to a high paying career. There are several vocations such as plumbers, electricians and even carpenters that earn a decent amount of money. These crafts can be learned free of costs via apprenticeship. Also, given the shortage of these professionals, this might turn out to be a good alternative way for high school graduates to move up the economic ladder.

To sum it up, it is necessary for the state to incur some amount of expenditure on education. This is because it is the state that saves money in the form of lower entitlement payouts and it also earns more money in the form of increased tax revenue. However, newer and cheaper methods such as apprenticeship should also be tried out instead of focusing only on college education.

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The article is Written By “Prachi Juneja” and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to and the content page url.