Economics of Education

UNIT 15

EDUCATIONAL PLANNING AND

ECONOMIC GROWTH

Structure
15.0

Objectives

15.1

Introduction

15.2

Cost-Benefit Analysis

15.3

Growth Accounting Equations and Production Function Models

15.4

Manpower Requirements Approach

15.5

Techniques of Manpower Forecasting

15.5.1

Rule of Thumb Method

15.5.2

Employers Estimates of Future Manpower Requirements

15.5.3

International Comparisons Method

15.5.4

Manpower-Population Ratios

15.5.5

Mediterranean Regional Project (MRP) Technique

15.6

Programming and Input-Output Models

15.7

Let Us Sum Up

15.8

Key Words

15.9

Some Useful Books and References

15.10

Answers/Hints to Check Your Progress Exercises

15.0

OBJECTIVES

After going through this unit, you will be in a position to:

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explain the need for and significance of educational planning for balanced,
meaningful and efficient economic growth;

elucidate the concepts such as Cost-Benefit Analysis, Production Function Models,

Growth Accounting Approach, Manpower Requirements Approach and
Programming, and Input-Output Models;

appreciate the significance of cost-benefit analysis in education;

identify the relative contribution of different variables in the growth/production

process to arrive at the economic value of education;

bring out the merits and limitations in the manpower requirements approach to
educational planning; and

appreciate the merits and limitations of systems approach i.e. input-output

modelling to educational planning.

15.1

INTRODUCTION

The 1950s was an era of intense global economic activity. This was the initial
period of decolonisation. The new nations were faced with the challenges of
nation-building and economic reconstruction. Achieving high levels of economic
growth was believed to be the magic wand for national reconstruction. This was
also the historical experience of advanced countries. Arthur Lewis was in the
forefront of this thesis, A.O. Hirschman, Dudley Seers being others. Leontiff had
also suggested a model, input-output model, to achieve high rates of economic
growth.

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Scarcity of resources, in particular capital, was a major constraint for developing

countries including India in making investments required for achieving growth.

Needs of the economy were enormous and goals of nation-building, as revealed in

the Indian case in its Constitution adopted in 1950, were noble. There were several
competing demands from society. Infrastructure for development roads, railways,
ports, aerodromes, communication, transport, financial institutions, markets, energy
and power were very poor. Added to this, illiteracy, infant mortality, maternal
mortality and morbidity were very high while life-expectancy and enrolment rates
in schools were very low. Demands from several sectors and sub-sectors such as
agriculture, irrigation, industry were co-existing with those of health, education,
housing, drinking water supply and sanitation. Public spending came under a cloud
whether the limited resources of the State be devoted to growthoriented sectors
or frittered away on welfare of the people was the issue. Education was treated
as a welfare/consumption sector. Even within the education sector there were
competing demands across adult education, school education and higher education.
Within the levels say school education there were competing demands across
programmes such as opening of new schools, supply of teachers, school buildings,
equipments, etc. It is in this scenario that developing countries began to think about
planning in general and educational planning in particular.

Educational Planning and

Economic Growth

In simple language, planning is a balancing act. It involves the balancing of needs

with resources towards set goals. Likewise, educational planning involves the
balancing of resources (both physical and human) available to the education sector
with the educational needs in such ways that they facilitate the realisation of
educational goals set under the national policies of education (see Fig. 15.1).
Education is both an instrument of integrated personality development of children
at the individual micro-level and of national developmental goals. Economic growth
is one of the foremost goals of national development. Hence education should be
employed to achieve economic growth.
EDUCATIONAL POLICY GOALS

EDUCATIONAL NEEDS

RESOURCES
PHYSICAL & HUMAN

Fig. 15.1: Balancing Needs and Resources

There are several approaches to achieve economic growth through education. Each
one of these approaches, as evident from scientific research studies, has its own
merits and limitations. The study and understanding of all these approaches are
essential to appreciate the space for educational planning in economic growth. In
the foregoing part of the unit, we will discuss some of the important approaches
in this regard.

15.2

COST-BENEFIT ANALYSIS

Cost-benefit analysis (CBA) is defined as a practical way of assessing the desirability

of an investment taking a long term and wider view of all the relevant costs and
benefits of a project. The long term view should essentially include both the immediate

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Economics of Education

as also the future implications of the investment/project. Likewise, the wider view
should take into account the side-effects of the investment/project to all the affected
parties like persons, region, ecology/environment, etc. CBA is thus an enumeration
and evaluation of all costs and benefits howsoever directly or indirectly related.
Cost benefit studies in the context of economics of education, look at education as
a market activity. Which course of action is profitable at any given point of time
can be known through such studies. This may not be of much help in large scale,
macro level planning and investment decisions. But it will guide the planner and
investor regarding the continuance or discontinuance of specific educational
programmes or the consumer regarding private individual benefits. These studies
are of more significance in economies where strong institutional systems for
assessment and functioning of markets are established. Economies with centralised
decision making arrangements offer less scope for benefiting from cost benefit
studies. Cost benefit studies are, therefore, more meaningful only in a market
economy. They are, however, relevant even in a mixed economy. But in economies
which are highly centralised, that is, in a state where the decisions regarding
production targets, avenues of production, investment decisions, choice of technology,
employment generation, etc. are all vested with a central authority, there is no
scope for speculation about alternative investment decisions in education. The
education sector will supply the manpower required for the economy which has
already been set by the parameters of demand, that is the production and investment
decisions. However, in a market economy, the state will have no control over
capital availability in the economy. Capital will be vested in private individuals or
corporate bodies. The state cannot speculate or make predictions regarding the
product choice, technology choice or scale of investments in private capital markets.
This is true of capital markets in mixed economies like India also. For instance,
nobody would have imagined a few years ago that Messrs Tata Company in India,
who are premier and prominent producers of steel, would one day begin to produce
and market as common an item of daily consumption as salt. Likewise, Messers
Godrej Company produces refrigerators as well as toiletry soaps. Products of a
capitalist may, therefore, range from luxury items to consumption goods of daily
use.
The nature and quantum of diversification in an economy throws up specific demands
to the employment market. The type of jobs in demand would in turn determine the
expectations from the field of education to generate the required skills. When there
are several educational programmes on a horizontal stretch, those programmes
which are perceived to lead to higher earnings will become popular, especially so
when they have similar levels of costs. They survive and others lose in competition.
The employment market determines the relative value of the programmes.
Components of Cost: In unit 14, certain components of cost like unit cost, direct/
indirect cost, private/social costs, etc. were introduced. In the present context of
cost-benefit analysis (CBA), some new dimensions of cost like institutional cost and
pupil cost need to be taken into account. Further, the significance of opportunity
cost also needs to be especially brought out in this regard.

30

In the typology of costs of education, the classification of direct/indirect cost is a

general one. Thus, all types of costs fall under either of these two broad
classifications. Institutional and pupil costs are two types of direct costs. The
expenditure made by a school/college on buildings, play ground, swimming pool,
gymnasium, etc. and expenditure on furniture, scientific and other equipments,
blackboards, laboratory, library, almirahs, overhead projectors, micro film reader,
film projector, slide projector, computers, sports and games materials, musical
instruments, etc. are some common examples of institutional costs. The institutional
costs expended on these items can be further classified into divisible operating cost
and non-divisible operating cost. An example of divisible operating cost is the

salaries paid to the teachers/staff. The underlying characteristic in a component of

divisible operating cost is that the total expenditure incurred can be divided by the
number of pupils expressing the same in per-pupil terms. Divisible operating costs
also include components like scholarships, mid day lunch, transport, etc. as they too
can be accounted in per pupil terms. Institutional costs incurred on a one-time basis,
lasting for a few successive academic sessions, are distinguishable from the directly
divisible operating costs in the sense that they are not easily expressible in per-pupil
terms (e.g. blackboards, almirahs, computers, etc.). Pupil cost, which refers to such
costs incurred directly by the students/parents on items like fees, books, hostel,
maintenance, transport etc. are yet another type of direct cost which is significant
in the context of CBA. The indirect costs, on the other hand, are also of two types
viz. transfer costs and opportunity costs. Tax rebates extended as incentives to
parents incurring expenditure on the education of children, on donations made to
recognised institutions and purposes, etc. are illustrations of transfer costs. They
are so called because the state has transferred its due share of benefits to educational
purposes and thus is a form of cost to the state. Opportunity costs, as introduced
earlier in unit 14, refers to a hypothetical income which could have been earned by
the students by taking up some economically rewarding work in case they were not
attending schools. The significance of this in the context of CBA is underscored in
view of the relatively low socio-economic status of a large number of poor families
in developing countries. The concept of opportunity cost (being only an imputed
cost i.e. a notional or an assumed cost and not a real expenditure) is especially
characterised by the difficulty to measure and account for it in the analysis of costs
in cost benefit studies. The following illustration makes it easier to appreciate the
intricacies of the measurement involved in this respect.

Educational Planning and

Economic Growth

Take the case of two persons A and B who completed their school final in 1978.
Person A went to the +2 stream, later completed his graduation in science and post
graduation in one of the science subjects. A became a lecturer thereafter in a
college in 1985. Person B pursued a course in one of the industrial trades in 1978
and completed it in 1980. He immediately took up a job in an industry and started
earning. He continued to earn till 1985 when A was still in college/university. B had
thus earned for sixty months by the time A had joined the employment market.
Supposing B invested this sixty months earnings, it would double every seven years
at 10 per cent interest per annum. The opportunity cost in this case would now
depend on the life time earnings of each, duly adjusted for the cumulative income
accrued to B by his investment of the money earned in the sixty months before As
taking up any employment and the cost incurred by A for his graduate/post-graduate
studies during the corresponding period.
The concept of opportunity cost is criticised on many grounds. Critics observe that
it is only a notional cost. The earnings foregone by one person which might have
been earned by another may not be invested by the latter. Further, employment
market may not be having steady potential to absorb skilled labour at all points of
time. The salary and service conditions of those who do skilled labour or take up
professional employment need not be comparable. Hence, assumptions regarding
opportunity cost will be valid and meaningful only when there is a demand for
skilled labour, waiting time for employment is zero, the income earned is not consumed
by the other person (either in part or full) but invested profitably, service conditions
are comparable, and so on.
Critique of Cost-Benefit Studies
Numerous criticisms have been levelled against the approach of cost benefit studies.
Many of these criticisms are centred on the assumptions underlying the cost benefit
studies. For instance, assumption about the average span of working life in life time
returns will vary from researcher to researcher. Some of the researchers do not
take waiting time for employment into account or underestimate the same. Further,
job in life need not be tied to the qualification of a person. Sometimes women are

31

Economics of Education

not considered for certain jobs even though they have the requisite qualifications.
Promotions within a career need not be based on additional qualifications or merit.
There has been a long standing debate on the role of intelligence in success in life.
Intelligence, defined as native ability, an inborn potential that is inherited from ones
parentage is considered as crucial for achievement and success in life. The
environmentalists reason out that intelligence is a social construct. It has no meaning
when it is divorced from social life. It is fashioned by the vicarious and rich quality
of the social milieu in which one lives. The level of development of a society is
dependent upon the levels to which a persons abilities can blossom. Education,
whether it is formal or informal or non formal, is one of these social determinants.
Believers in inherited abilities discount the value of education in life time earnings.
They consider that to a large extent the success of a person in a career or self
employment or business or trade depends on his intelligence which is an inborn
potential. Intelligence or innate abilities of a person, his personality structure, styles
of work etc. may influence his chances of getting better jobs, promotions and
higher earnings.
Keeping in view all these objections to the computation of returns wherein
qualifications are given status as causal variables for life time earnings of a person,
researchers in the area of cost benefit studies generally allow a correction factor,
by way of a coefficient (or a constant), to take care of contributions to life time
earnings from all the extraneous variables. The per centage of allowance credited
to these variables ranges from 20 to 30 in studies on estimates of returns.

15.3

GROWTH ACCOUNTING EQUATIONS AND

PRODUCTION FUNCTION MODELS

Relating the total output produced to inputs, this method measures the relative
differentials in contribution to growth by the different factors of production. The
contribution of various factors of economic growth is assessed and measured in this
approach. Economic growth is defined in terms of national income. An account of
national income is drawn in such a way as to balance it with the contributions of
economic growth. National income is normally measured in two ways: (i) the total
costs of all the factors employed to produce the given output, (ii) the market prices
of the commodities and services that are produced in a given year.
It is possible to consider an extension of the growth accounting technique with
more variables considered. Such works come under what is called as econometric
modelling. A model is a simplified representation of reality that is used to explain
or predict the interaction between (and among) the variables. Explanation provided
can be through diagrams or equations while interpretations can be made in plain
language. A production function model, in particular, explains the interaction of
variables in production. They treat production or growth as a function of such
interactions. These type of models are used to examine, assess and estimate the
relative weights of different variables and sub-variables in their interactive functioning
and contribution to economic growth. A few economists from the Chicago School
of Economics, U.S., used this approach in the late 1950s and early 1960s to
examine the sources of economic growth in the United States. One of the landmark
studies in this genre was by Edward F. Denison in 1962. In a simplified framework,
the technique adopted may be described as follows.

32

Using the growth accounting technique, Denison explained the sources of economic
growth in the United States during the period 1929 58. He accounted for the
recorded rise in national income by balancing the factor shares of production with
the total output produced. Since the effort was directed at accounting for growth
over a period of time, the technique came to be known as the growth accounting
approach. The Cobb Douglas Production Function Equation (known so for its

development by Cobb, a mathematician from Cambridge, and Douglas, an economist

from the United States) was used for the purpose. The production function equation
assumes that the quantity produced in a country is determined by the interplay of
labour (L) and capital (K). Although these two, i.e. labour and capital, are considered
as the main factors, there are other factors or variables which influence the
relationship. As they could not be accounted explicitly, they are treated as a constant.
Hence, Q, the quantity produced is the outcome of the interplay of L and K
along with other factors denoted by a constant A. The capital used in production
included fixed capital such as land and circulating/perishable/consumable capital
such as raw materials, machines, electricity, etc. In equation form, the relationship
was expressed as:
a1 - a
Q = A . K . L where

Educational Planning and

Economic Growth

the symbol a (alpha), a constant, stands for the contribution of the capital K to
national income. Since the total contribution of L and K is one (a unit), the contribution
of L is (1 a). The contribution of capital and labour as well as that of A can
be determined by solving for the parameters/constants (i.e. A and a) when time
series data on the three variables L, K and Q are available.
Denisons work on the national income data for the U.S. during the period 1929 58
showed that the average annual rate of economic growth was 3.9 per cent. Denison
attributed 1.6 per cent of this growth to the share of capital and 1.0 per cent of
this growth to labour. Hence 1.3 per cent growth was left unexplained. The traditional
neo classical factors of production viz. land, capital and labour could not explain it.
The residual per centage was as high as one third of the total economic growth in
the United States. Denison began to analyse this residual so as to identify its
elements and their share, if any, in total output. For this reason, it has also been
called as the Residual Analysis Approach.
Traditionally, the contribution of labour to national product was conceived in terms
of effort, that is, in terms of the number of hours of work put in by individual
labourers multiplied by the total number of labourers in the work force. But Denison
began to look at labour not only as effort but in terms of acquired ingenuity, skills,
techniques, health status, formal education etc. He was conscious of the fact that
the residual is left unexplained because the quality of inputs had not been accounted
for. In spite of attention to these factors/variables there will still remain a residual,
a new one, which will be left unexplained. Denison expanded the Cobb Douglas
production function equation by breaking up the rate of increase in labour quality
into three constituents: LE , LA and LW; E representing changes in educational
achievement, A for changes in labour quality attributed to age and sex composition
of the work force, and W for changes due to varying average work weeks in a
year. With these factors incorporated, Dennison found that during the reference
period 1929 to 1958, labour quality in the U.S. work force, measured in terms of
health, fitness, experience, skills and educational attainments, grew at a rate of 1.4
per cent per annum. He also could deduce that changes in labour quality accounted
for over fifty per cent of the annual growth in A with nearly 40 per cent of the
change in A due to changes in LE i.e. the educational attainments of the work force.
He, therefore, concluded that education represented a form of capital, known as
human capital.
The work of Denison was furthered by Theodore Schultz who identified different
sources by which human capital is developed. He identified formal education in
schools and colleges, non formal education, and on the job training which may be
either pre service or in service as the three major sources. The implications of the
study by Denison read with the analysis of Schultz indicated that expenditure on
education is a form of investment and not just consumption. In other words, education
33

Economics of Education

is not merely a welfare proposition but an investment avenue. Schultz reworked

with the same data that Denison had used and arrived at identical results. Later,
Becker also did growth accounting analysis and demonstrated the values of health
and education as forms of human capital. Abramovitz had earlier called this residual
as a measure of ignorance of economists regarding the sources of economic
growth while Solow attributed this to refinements in technology. Many hardcore
economists subsequently toyed with technology as the factor contributing to the
residual growth denying thereby a high degree of value to human capital in explaining
the constant A in the production function equation. The human capital theorists
still held on to their contention by observing that an improvised technology cannot
be transferred or adopted in a vacuum without a human medium. Technology can
only minimise human labour but would still require a high level of human capital for
its operation. With this argument conceded, the inference that expenditure on relevant
science and technology education is a form of investment assumed credence.
However, a similar inference in respect of primary education was not straightaway
possible due to certain factors outlined below.
Does the money spent on primary education constitute consumption expenditure or
an investment avenue? People with just primary education will not participate in
secondary sector activities. Between the sexes, a large proportion of consumers of
primary education remain as housewives. Given this scenario, how can primary
education contribute to increases in productivity by utilisation of technology? For
instance, even if new agricultural practices/technology have to be publicised through
a programme of extension education, formal primary education is not an essential
requirement for the same. It is observed that even illiterate farmers in developing
countries adopt new agricultural practices. It is for this reason Schultz distinguished
three types of education viz. (a) education for current consumption, (b) education
for long term future consumption, and (c) education/training for skills and knowledge
directly used for production. Any education that helps an individual to understand
nature and society, as well as assist him to adjust and live in harmony with them,
is treated as education for current consumption. An education that provides skills
and knowledge for farmers and workers in agricultural and industrial production are
illustrations of knowledge/skills used for production [i.e. type (c) above]. Higher
levels of technical or professional education leading to higher degrees of human
capital would be of value for long term future consumption.
Human rights champions are cautious of the debate regarding the status of education
as consumption or investment. For them, primary education is a basic human right.
It is essential for the simple functions of life as food is for the body. It is the duty
and obligation of the well provided and privileged sections of society to concede this
basic human right and extend adequate facilities for honouring the same. It is not
that in the interest of welfare of the weaker sections of the society primary
education needs to be universalised but even in the larger interests of the well
being, continuity and progress of human civilisation primary education requires to
be provided for all.

34

Denisons technique of analysis was later adopted by Jorgenson. Jorgenson and

Grilliches (1984) worked on U.S. data on national income first for the period 19581973 and later for the period 1974 to 1988. Jorgenson accounted for all the possible
factors that contributed to national income including non market productive activities.
His residual analysis approach demonstrated the contribution of skills and education
to increases in production. It highlighted the significance of quality of labour in the
process of development. Every addition to the level of education or stepping up of
skills resulted in increases to national products. Differential contributions to national
product indicated the marginal values of educational levels. However, the residual
analysis approach could not help in deciphering whether the educational levels were
profitable at a given point of time, especially from a macro perspective. Though a
higher level of education appeared to be profitable, the exact margin of benefit for

the individual and the society was not clear. Further, at higher levels, the diversity
in specialisation of courses also meant varying degrees of economic value. The
benefits generated by the variety of educational programmes could not be captured
by Residual Analysis approach. The life time returns on alternative investment
possibilities was thus not clear. These and similar issues are more effectively
tackled by cost benefit studies.

Educational Planning and

Economic Growth

Check Your Progress 1

1) Which types of economic organisations allow for cost-benefit studies and analysis?
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2) Define opportunity cost with an example from the field of education.
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3) Identify the limitations of cost-benefit approach to educational planning.
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4) How did Denisons study establish that education is a form of human capital?
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5) Identify the limitations of growth accounting/residual analysis approach to
educational planning.
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15.4

MANPOWER REQUIREMENTS APPROACH

Recall that manpower was earlier defined in unit 13 and was also distinguished
from human capital. In this approach, certain categories of highly qualified manpower
categories like doctors or nurses are determined as proportions of total population
e.g. doctor-population ratio, nurse-bed ratio, etc. Likewise, it is common to determine
the number of teachers required as a proportion of teacher-pupil ratio.
Manpower analysis is intended to provide an incisive account of the availability, the
needs and the demands for educated, trained or skilled personnel in an economy
at a given point of time. There is a need to distinguish between manpower need
and manpower demand. At any given point of time, the number and variety of
skilled personnel required for an economy is known as manpower need. Alternatively,
taking into account the current level of investment in the economy, prevailing levels
35

Economics of Education

of technology, trends in economic growth and potential for the same in future, the
types of economic activities it may generate, the types of roles and functions to be
performed by the people, the skills and knowledge they require to perform the
specified roles effectively and efficiently, the analyst would assess the number of
persons required at different sectors and levels of the economy to realise the
objectives of investments. The forecasting of personnel needed, over a period of
time is known as estimating the demand for manpower. In this sense, manpower
analysis serves as an instrument of directing the growth/development of an economy
in a systematic way. It will assist in achieving coherence between the educational/
skill development of a sector ensuring thereby the complementarity needed for the
growth of other sectors of the economy. By doing so, manpower analysis would
facilitate achieving the dual objectives of maximisation of economic growth and
minimisation of wastage of resources.
Manpower forecasting is one of the dimensions of manpower analysis. It is an
exercise wherein certain assumptions are made about intended directions and targets
of economic growth. Based on these assumptions, the sector wise manpower
needed by different levels of educational attainment are estimated for a future date.
Some of the popular techniques of manpower forecasting are outlined below.

15.5

TECHNIQUES OF MANPOWER FORECASTING

Parnes, an American economist, observed that it is possible to assess the optimum

number of educated manpower required for attaining specific targets of economic
growth. The concretisation of this idea resulted in the form of several techniques
of manpower forecasting. In one of its reports the UNESCO observed that during
the reference year 1968, 60 countries were using one or the other type of manpower
models for planning and providing education in their countries. Over the years,
there have been improvisations/refinements in manpower forecasting. As of now,
five distinct methods used in this field have been identified. A brief description of
these methods is provided below.

15.5.1 Rule of Thumb Method

Sir Ashby had been requested in 1960 by the Government of Nigeria to submit a
report on manpower development in Nigeria. In doing so, in the absence of reliable
micro level data, Ashby assumed that high level manpower should grow twice as
fast as the target of economic growth. Likewise, second level manpower should
grow three times as fast as the target of economic growth. This ratio was suggested
on the basis of the experience that high level manpower categories like engineers,
doctors and other professionals will always be skewed at the top as compared to
their important junior level functionaries like technicians, para-medical and other
supporting staff at lower levels. However, the relation of the production of manpower
to targeted economic growth did not take shape in expected ways. This was
because the assumptions made were not based on hard data. Hence it came to be
known as the Rule of Thumb method.

15.5.2 Employers Estimates of Future Manpower Requirements

36

One of the parameters of demand for employment in a firm or a factory or an

establishment is the level of capital investments, the others being technology inplace, and the type of products or its anticipated nature of diversification. In a
remote way even the quality of infrastructure facilities such as markets, roads,
communication etc. may also throw up demand for employment. However, the
employer will not have any control over the support systems. The employer can
definitely take into account the level of capital investments that is going to be made,
the technology that is going to be adopted and the kind of products that are in view.
Keeping these factors in mind, the labour required per unit of output can be
assessed. For example, taking the case of an automobile accessory, the employer

will, in the first instance, work out a project proposal along with a feasibility report
taking into account the markets, availability of raw materials, competitive atmosphere,
etc. In the subsequent stages manpower categories like number of designers,
engineers, supervisors, shop floor workers, managers, accountants, clerks, market
executives, sales workers, etc. are identified. Given this information, the levels of
educational skills that are in demand for each level of education can be assessed
and aggregated for a given region. This would then indicate the nature of demand
for education. If the trends in out-turn of educated persons from schools and
colleges interested in employment are known then we will have information regarding
supply in the given region. When information on demand will be juxtaposed with
information on supply, then the gaps will guide the required future supply of
educational skills. This in brief is the assumption underlying the employers estimation
technique.

Educational Planning and

Economic Growth

This method was employed all over India in 1978 when during the fourth year of
the fifth Five Year Plan, a nation-wide project on vocationalisation of higher secondary
education at the +2 stage in the 10+2+3 pattern of education had been launched.
Specifically, in Karnataka State, a special grant was made to the Directorate of
Vocational Education for undertaking a district-level survey of vocational needs.
The employers estimate method was used for the purpose. Under this initiative,
district vocational survey reports were prepared for all the 19 districts of the State.
It is pertinent to record that the response to the questionnaires canvassed by the
District Vocational Survey units to the firms, factories and establishments was quite
low. It was hardly ten per cent. Still, data were subjected to usual analysis and
recommendations for planning vocational education were made. The question that
arises from the limited response to this technique concerns its feasibility. Further,
in a country like India, where information on private incomes are not systematised
and accounted for in taxation exercises it is understandable that the employers will
not forward accurate information useful to obtain accurate estimates of value based
variables like investment. In this situation of uncertainty, it would not be worthwhile
to draw up the educational plan on the basis of simulations regarding the behaviour
of the private sector. The private sector may behave in an unpredictable way in
regard to product choice and extent of diversification of their activities. An educational
planner or a manpower analyst cannot determine successfully on the investment
expectations of the private sector. For these reasons, the technique of educational
planning based on employers estimation has not found much favour.

15.5.3 International Comparisons Method

In the 1960s, a few developing countries of the world looked around the developed
world in search of models of development. For instance, South Korea examined the
profile of development of a few industrialised nations of the world such as Japan,
the United States and the Federal Republic of Germany. Other illustrations are:
Puerto-Rico used the coefficients arrived at by the United States while Italy used
those of France. Even a model firm of one country can be taken as a model for
a similar firm in another country. On a comparative and summative analysis, Korea
realised that every increase in national income by one per cent was associated with
an increase in participation of high-level manpower by 1.038 per cent. Likewise, the
corresponding increase in participation of second level manpower was 1.655 per
cent. Based on this information, South Korea planned its manpower supply by
adopting the same ratios.
This approach of looking to one country as a model cannot be followed by all
countries. The chief parameter that controls the process of development in a
country is its geographical location. For instance, a country like Nepal which is
landlocked cannot think of modelling after Japan or France. Further, apart from
geographical factors there are other factors related to the history and culture of the
people. For instance, one of the factors associated with Japans rise as an industrial
37

Economics of Education

power is the quality of the people, their work-culture, self-discipline, entrepreneurbehaviour, etc. Hence, international comparisons as an approach for manpower
planning has limited value.

15.5.4 Manpower-Population Ratios

In this technique, manpower will not be planned for the economy as a whole. It
will be planned for sectors or sub-sectors of an economy. For instance, planning
may be attempted for the education sector or the health sector. Taking into account
such parameters as population growth rate, enrolment trends in standard I of
primary education or any other given standard of education, the existing pupilteacher ratios and the targeted ratios are first arrived at. The number of teachers
required in primary or any other level of education are then estimated using this.
The present levels of supply of teachers from colleges of teachers training, the
unemployment rate, waiting time for employment, number of institutions that are
supplying teachers, etc. are suitably factored/used to estimate the requirement of
teachers and other categories of manpower of the education sector. Likewise, the
number of doctors required in a country can be estimated keeping certain norms
regarding doctors-to-population ratios. The para-medical staff required can also be
arrived at by a similar approach. An educational plan can follow from the supply
side to balance the demand for manpower estimated by such a sectoral approach.
This technique is popular because of the degree of precision that is possible in such
sector focused manpower estimates. Level of investment in health, education,
housing or any other welfare/development project is an important parameter in
manpower planning. Once information regarding investment becomes clear, then it
would be easy to work out a detailed plan. Hence, sectoral planning is preferred.

15.5.5 Mediterranean Regional Project (MRP) Technique

This technique had been initially employed by the OECD (Organisation of Economic
Cooperation and Development, Europe) to prepare manpower plans for six countries
which were sharing the Mediterranean Sea. The sea-based resources served as
one common feature for all these countries. The countries covered were Greece,
Italy, Yugoslavia, Portugal, Turkey and Spain.
There are essentially three major steps in forecasting demand for skilled and
qualified manpower: (i) projecting the demand for educated manpower, (ii) projecting
the supply of educated manpower, and (iii) balancing the demand with supply.
Under the MRP technique, there are five steps in projecting demand for qualified
manpower.
Step 1: Estimating the Level of Output for the Target Year
Taking into account several parameters of economic growth such as past trends,
present as well as proposed investments at the macro-level, population pressures,
etc. the desired target of economic growth in terms of GDP per capita for a given
year in future will be set. The GDP per capita of the accounting year will be taken
as base year. The year for which a desired GDP is targetted is the target year.
Increases in output required to fill up the gap will be computed taking into
consideration the growth rate of population.
Step 2: Sectoral Distribution of Targeted Increase in GDP

38

There are two ways of increasing the GDP: (i) project and accomplish the growth
in various sectors through linear increases, and (ii) modernise or diversify the
economy effecting structural changes therein. In a given year, the contribution of
each sector of the economy to the total GDP and the same as a proportion to the
total is known. Keeping in view the proposed policy interventions the contribution
and share of each sector can be determined.

Step 3: Estimating Labour Productivity by Economic Sector for Target Year

and its Change between Base and Target Year

Educational Planning and

Economic Growth

Contribution of each sector to GDP is known. The contribution of a given sector

to GDP in the target year is already estimated. The productivity of labour for each
sector in the target year is estimated by dividing the GDP share of each sector by
the number of workers in that sector. Labour productivity might change from the
base to the target year. This may be due to improvements in technology, management
techniques and related factors. Such changes are accounted and labour productivity
is estimated for the target year.
Step 4: Estimating Occupational Structure of the Labour Force within
Economic Sectors in the Target Year
The total output in the economy, the sectoral shares therein and labour productivity
in each sector are now known for the target year. However, the input labour is
not a homogeneous category. There are a large number of persons with diverse
occupational skills in each economic sector. There is need for information about the
occupational structure of the economic sectors not only in the base year but also
in the target year. The structure would have changed because of several interventions.
For this purpose, a typology of occupations is required so that a large number of
occupations can be classified for operational purposes. The census of India follows
an eight-fold classification of occupations for reporting about the occupational
structure of the labour force. There is also an International Standard Classifications
of Occupations (ISCO). The classification of occupations made at the first layer
under the ISCO is as follows:
1) Professional, technical and related workers;
2) Administrative and Managerial workers;
3) Clerical and related workers;
4) Sales workers;
5) Service workers;
6) Agriculture, animal husbandry and forestry workers, fisherman and hunters;
7) Production and related workers, transport equipment operators and labourers;
and
8) Workers not classifiable by occupation and defence personnel.
The proportion of persons in each of these eight major occupational groups in the
ten major industrial sectors of the economy are estimated for the base year. These
proportions will change for the target year in relation to changes in the economy,
technology and investment policies. The sum of occupational distributions of persons
in all the ten economic sectors derived on the basis of proportions estimated for the
target year will provide the aggregate distribution in the economy. For instance,
sales workers in all economic sectors could be aggregated to get total sales workers
in the economy. The same procedure applies for other occupational groups.
Step 5: Estimating the Educational Structure of the Labour Force in the
Economy for the Target Year
The educational levels of persons within each occupational structure for the base
year are noted. For instance, service workers may be either 1-year certificate
holders or diploma holders with 2 to 3 years of technical education. Further, the
area of workers would be different depending on the area of specialization pursued
(e.g. secretarial practice, radiology, photography, hotel management, etc.). Proportion
of each level and type of education within each occupational category needs to be
computed. In conjunction with the results of the exercises obtained earlier in step
4, the requirement of the number and type of educated workers can be estimated
for the target year.
39

Economics of Education

In sum, the steps involved in forecasting demand for educated manpower are:
fixing the level of GDP or national output for the target year, distribution of this
GDP across economic sectors, determining labour productivity by economic sectors,
assessing the occupational structure in each economic sector, and estimating the
educational structure of the labour force.
The MRP technique became quite popular among planners though it has certain
limitations. The limitations are rooted in the nature of assumptions made. One of
the assumptions is that the state of technology will remain stagnant. If this assumption
is belied, that is if new technologies enter the market or innovations and adaptations
are effected in the existing technologies, then these developments would be
accompanied by substitutions between labour and technology. For example,
modernisation of the Amber Charakha or indigenous spinning machine may bring
large-scale changes in the handloom industry. It may carry spin-off effects on
textile and manufacturing industries. This would disturb the estimates of the demand
for manpower.
Another assumption that is on a slippery ground concerns the investments in the
economy. In a mixed economy as that in India it is not feasible to speculate on the
investment potentials and plans for diversification of the private sector. They tilt the
economic balance and thus hamper the estimates of the manpower plans. Still, with
all the reservations, MRP technique remains a sophisticated and systematic method
of manpower forecasting/planning.

15.6

PROGRAMMING AND INPUT-OUTPUT MODELS

Output normally refers to total production of a country. The total production is

composed of production in three major sectors: (a) primary sector including
agriculture, irrigation, animal husbandry, forestry, fisheries, and mining/quarrying;
(b) the secondary sector referring to industry including processing and manufacturing,
generation of electricity, gas, water, etc. and also construction; (c) the services
sector comprising transport, communications, trade, commerce, finance, law &
order/legal, etc. The primary sector thus refers to activities in which products
derived from natural resources like land, water and animals are included. The secondary
sector refers to products derived by a process or an operation (like processing or
manufacturing) on the products extracted from the primary sector. The services
sector includes activities in which the products derived from the primary and
secondary sectors are distributed to various intermediate and final points of
consumption besides providing various other services to producers and consumers.
Labour, capital and technology are the primary inputs for production of output.
Every unit of output is estimated in conjunction with the quantity of inputs and viceversa. Output is measured per unit of labour or unit of capital. Efficiency of
production is measured per unit of inputs assuming certain elasticities. Inputs are
calibrated with outputs to maximize production. Calibrating of all inputs for achieving
expected levels of outputs is called programming.

40

During the 1920s there was a movement across the advanced world to look at the
process of production as a system where the variety of components/constituents
interact among each other. If these interactions are made vigorous and meaningful,
then there would be a possibility of boosting the efficiency of the whole process
of production. Frederick Taylor looked at the system from the angle of time taken
for each activity and the scope for reducing the time taken by the employees.
Studies in this genre became popular as Time and Motion Studies. Time was only
one variable in the efficiency of production. Systems-thinking was very popular in
all social sciences disciplines as was evident in the works of Walras in economics,
Watson Norman L Hull in Psychology, Talcott Parsons in Sociology, Herbert Simons
in Political Science and W. Schramm in Communications Science.

Systems thinking influenced a young Russian born American economist Wassily

Leontiff to take stock of all types of inputs for the American economy in its
production process along with the variety of outputs for the period 1919-29. He
computed the effects of changes in the input structure of different industries on
levels of output and prices of their production, and in particular on the standard of
living of households. Using this technique it was also possible to estimate the effect
of changes in the level and composition of final demand on the intersectoral distribution
of output and employment (Leontiff, 1941). George Dantzig, a young mathematician,
used this technique to settle upon an optional choice across cooking recipes. In
the process, he invented a method of estimation of a mix of output for a given mix
of inputs known as Linear Programming.

Educational Planning and

Economic Growth

It is to be noted in passing that the Indian economists and planners during the first
decade of the Indian Republic, used a model of planning for development, popularly
known as the Harrod-Domar/Mahalanobis Model wherein they heavily used
Leontiffs Input-Output tabulation technique.
Input-output models are used in economics of education in studies of cost-quality
and education-labour-earnings relationships. Different levels and forms of education
have different time spans, costs, resource needs and gestation periods for
employment. They also lead to different types of employment opportunities for
similar educational programmes and for different types of education. Levels and
forms of education with comparable inputs may lead to different earning streams.
For example, a matriculate, an intermediate, a diploma holder of three years from
polytechnic in any engineering discipline, one with 3 years industrial training, and a
general graduate would each be served with diverse job opportunities and life-time
earnings. Which courses lead to which types of job and how much life-time earnings,
reflects the efficiency and economic value of educational courses.
Quality of outputs of education is determined partly by the quality of inputs. In a
sense, it is in keeping with the English proverb: as you sow, so you reap. Quality
has a cost. Similar inputs of different quality have differing costs. For instance, an
elementary school teacher has to be paid differently if the qualifications/quality of
the teacher differs. A 12 + diploma holder with teacher training differs from a
graduate or a post-graduate with teacher training who opts to teach at elementary
level. While government/State supported schools recruit 12+ graduates (with teacher
training), the self-financing urban (private unaided) schools recruit post-graduates
to teach at the elementary level. Quality of work and quality of output thus varies
with the costs. How to raise quality while minimising or rather optimising cost of
education is an important area of work in input-output analysis.
There have been a number of studies in education which have used Systems
Analysis approach for examining the relationships between input-output variables
and the way the inputs get processed as outputs and emerge as outcomes. Some
of these works are cited under some useful books at the end.
The systems approach to education is criticised by Kenneth Arrow, a Nobel Laureate
well known for his theory of social choice. Famous for his Screening Hypothesis,
Arrow asserted that education acts as a signal or a filter and does not lead to
earnings. A persons opportunities for employment and earnings get influenced by
the persons gender, contacts, experience, intelligence and competence, emotional
maturity, language proficiency, rural-urban background, etc. Thus, qualifications can
be only one of the variables. This criticism is applicable both to input-output studies
as well as cost-benefit studies.
Check Your Progress 2
1) Distinguish between manpower need and manpower demand.
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41

Economics of Education

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2) Identify the techniques of manpower forecasting.
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3) Delineate the steps involved in the MRP technique of manpower planning.
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4) Identify the uses of input-output analysis technique in education.
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5) State the limitations of the use of input-output analysis in education.
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15.7

LET US SUM UP

An economy with scarce resources and enormous needs and aspirations requires
planning. This is true of the education sector also. Educational planning facilitates
an economy in boosting the efficiency of educational expenditures and helps in the
provision of meaningful (to the market) and relevant education which ultimately
contributes to higher level of economic growth.
There are several approaches to educational planning, each of them having its own
merits and limitations. For instance, while manpower planning would be highly
useful for a macro-economy, cost-benefit studies would be useful to compare the
relative merits of individual educational courses/levels.
Production or growth is a function of interaction of a variety of variables that
contribute to growth. A model that examines, explains, assesses and predicts the
relative differentials in values/contributions of variables to economic growth is a
Production Function Model. This model was used by leading economists of the
world such as Edward F Denison, Theodore W Schultz, Gary S Becker and D. W.
42

Jorgensen to measure the contribution of education to economic growth in the

United States for different periods of time.

Educational Planning and

Economic Growth

While Cost-Benefit studies in education are quite useful and relevant in a market
economy, manpower studies would be most effective in centralised economies. As
techniques of understanding for educational planning, both of them are useful in a
mixed economy such as India.
There are five well known techniques of manpower forecasting. These are: (a)
Rule of Thumb Method, (b) Employers Estimates, (c) International Comparison
Technique, (d) Manpower Population Ratios, and (e) MRP Technique. Of all of
them, MRP technique is most sophisticated.
Input-output models are used in economics of education in studies of cost-quality
and education-labour-earnings relationships.

15.8

KEY WORDS

Educational Planning

Balancing educational resources with

educational needs towards policy goals in
education.

Cost-Benefit Analysis

A technique to measure the life-time earnings

as well as non-monetary returns from different
levels of education.

Production Function Model :

A technique to examine the relationship across

a variety of variables that contribute to
economic growth and measures the relative
differentials in the contribution of variables/subvariables to economic growth.

Growth Accounting Equation:

Technique adopted by Denison and Schultz to

measure the relative differentials in contribution
to economic growth of various factors of
production, as used initially for economic data
of the United States.

Manpower Requirements
Approach

Keeping in view various factors such as

investments, technology and labour in an
economy, this technique facilitates the
determination of needs and demand for skilled
labour or human capital.

Input-Output Model

Treating an economy as a system of

relationships and interactions across a variety
of resources employed for production with the
goods and services produced therein, this
technique helps in boosting the efficiency of
production.

15.9

SOME USEFUL BOOKS

W Leontiff (1941), The Structure of American Economy.

J Mincer (1970), The Distribution of Labour Income: A Survey With Special
Reference to Human Capital Approach, Journal of Economic Literature, Vol. 8,
pp. 1 to 26.
E A Hanushek (1976), Comments in Fromkin J et. al, Education as an Industry,
Ballinger, Cambridge MA.
43

Economics of Education

15.10 ANSWERS / HINTS TO CHECK YOUR PROGRESS

EXERCISES
Check Your Progress 1
1) Market and mixed economies allow for the use of cost-benefit analysis.
2) It is the income foregone by a person while pursuing a course of study which
is notionally compounded over a life time at market rates of interest. See
section 15.2 for further details.
3) See section 15.2 and answer.
4) See section 15.3 and answer.
5) See the end of section 15.3 (last para) and answer.
Check Your Progress 2
1) See Sub-section 15.4 and answer.
2) See Sub-section 15.5.1 to 15.5.5 and answer.
3) See Sub-section 15.5.5 and answer.
4) Input-output analysis technique facilitates the appreciation of efficiency of
education systems.
5) It is not advisable to identify one-to-one relationship between education and
earnings. A number of other factors influence the earnings of a person.

44