Recommendation 5.5: The value of education output should be measured independently of the cost of inputs. Output should be measured using an incremental earnings approach or a housing value approach.
In the framework outlined in this chapter, there likely will be a substantial “profit” in the education account. This is in part because investment in education may, in fact, deliver a high private return compared with other investments and in part because some of the costs of education are unlikely to be fully accounted for in the education account.
Concerning the former, education may generate a high return because capital constraints prevent workers from investing sufficiently in education (see Ellwood and Kane, 2000; Carneiro and Heckman, 2002), because devoting time to education is viewed as difficult or unpleasant by a substantial number of potential students, or because, for any individual, education is a risky investment and part of the return is a return to risk.21 In addition, the return could be high because students apply high personal discount rates or underestimate the return to education. And it is possible for the market for human capital to be in temporary disequilibrium because supply can adjust only slowly over time to demand shocks. These concerns, of course, apply to many kinds of markets.
Concerning the latter, investment in children of preschool age is, to some extent, a part of the cost of education that is not measured by the education accounts. In addition, home production necessary to students’ school attendance—including activities that range from nurturing and psychological support to preparing school lunches—is another input that is not fully reflected in the education accounts. As with other accounts, it is important to be aware of the reasons for a surplus (or deficit) of output over inputs before making decisions based on the accounts.