Chapter 10 Education and Nonmarket Outcomes

This chapter explores the effects of education on nonmarket outcomes from both theoretical and empirical perspectives. Examples of outcomes considered include general consumption patterns at a moment in time, savings and the rate of growth of consumption over time, own (adult) health and inputs into the production of own health, fertility, and child quality or well-being reflected by their health and cognitive development. They are distinguished from the labor market outcomes of education in terms of higher earnings and wage rates. The focus is on identifying causal effects of education and on mechanisms via which these effects operate. The chapter pays a good deal of attention to the effects of education on health for a variety of reasons. They are the two most important sources of human capital: knowledge capital and health capital. They interact in their levels and in the ways they affect the cost and usefulness of the other. There is a large literature addressing the nature of their complementarities. While each affects the production and usefulness of the other, there are important dynamics of their interaction, seen in the age-structure of the net and gross production of the two. This sequencing also affects their optimal amounts. In the conceptual foundation section, models in which education has productive efficiency and allocative efficiency effects are considered. These frameworks are then modified to allow for the endogenous nature of schooling decisions, so that observed schooling effects can be traced in part to omitted third variables such as an orientation towards the future. An additional complication is that schooling may contribute to a future orientation in models with endogenous preferences. The empirical review provides a good deal of evidence for the proposition that the education effects are causal but is less conclusive with regard to the identification of specific mechanisms.