Education policies and economic welfare: A theoretical analysis in job-ladder framework

The analysis in this paper shows that in an economy with wage rigidities in the skilled sectors (modern and education sectors), the result of quality-enhancing policies under the simple job ladder model is an increase in the total size of the educated labor force.

It studies the effects of selected education policies on the size of the educated labor pool and on economic welfare using the “job ladder” model of education, which is relevant to liberal arts education in developing countries. The policies considered are (1) increasing the teacher-student ratio, (2) raising the relative wage of teachers, and (3) increasing the direct subsidy per student. In addition, the chapter analyzes the impact of wage rigidities in the skilled or modern sector on the size of the e ducated labor force. The analysis consists of five major sections. First, it reformulates the Bhagwati-Srinivasan job ladder model to make it amenable to analyzing the comparative static results of the effects of selected policies. Second, since higher education is mostly publicly financed, the analysis extends the job ladder model to incorporate public financing of the education sector. It then examines that model along with the effects of changes in policy parameters. Third, the analysis develops another extension of the job ladder model to include private tuition practices used by teachers that are prevalent in many developing countries. Fourth, to analyze the impact of wage rigidities in a less-restrictive framework where individuals can choose education based on ability and cost, the chapter develops an overlapping generations model of education with job ladder assumptions of wage rigidities in the skilled or modern sector.