Consumption benefits of education

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FACULTY WORKING
PAPER NO. 856

Consumption Benefits of Education
Walter W. McMahon

Coiiege of Commerce and Business Administration
Bureau of Economic and Business Research
University sf Illinois, Urbana-Champaign

BEBR

FACULTY WORKING PAPER NO. 856
College of Commerce and Business Administration
University of Illinois at Urbana-Champaign
March 1982

Consumption Benefits of Education

Walter W. McMahon, Professor
Department of Economics
Department of Education

Abstract

New developments in the economic theory of household production of
final consumption satisfactions has led to a vast outpouring of new
research on the contribution made by education to the efficiency of
production of these final consumption satisfactions during leisure time
hours within the family.

The results of careful research must hold constant the benefits of
education in the form of higher earnings, so that these are not counted
indirectly when measuring non-monetary consumption benefits. Results of
the studies surveyed here point to strong evidence that the better
education of the woman in a family contributes to her own better health
and the better health of her husband and children. There is also
evidence that education contributes positively to the education of the
children, to earning a higher rate of return on savings, and to more
efficient home management (e.g. purchasing behavior, tele-banking, or
efficient appliance repairs). But other studies find that education is
counter-productive in those aspects of housekeeping where the cognitive
and affective attributes it develops contribute less to productivity and
therefore encourage substitution of time away from activities such as
dishwashing, mending, and the more time- intensive aspects of child
rearing. This is somewhat analogous to the effects of education on
productivity and on time substitution within and among jobs in the
marketplace.

Consumption Benefits of Education

The consumption benefits of education are regarded here as the
non-monetary returns accruing from education to the individual through-
out the life cycle. As such, they include not only the non-monetary
satisfactions enjoyed by the student while in school, but also the
contribution made by education to the efficiency of household produc-
tion of final consumer satisfactions during leisure time hours before
and after retirement, plus the contribution made by homemakers during
the non-market time spent in household management and child rearing.

Many of these consumption benefits have been measured in a vast out-
pouring of recent research. This research has largely followed the
lament by T. W. Schultz in surveying the earlier literature that "all
these studies omit the consumption value of education. . .It is a
serious omission. . .The available estimates of earnings from education
in this respect all underestimate the real value of education"
(Schultz, 1967, p. 300). The most fruitful empirical results have
been achieved by use of the theory of household production as developed
primarily by Gary Becker (1975, pp. 67-8, and 1976, Ch. 7) and as ex-
tended and recently surveyed by Robert Michael (1972, 1982), in an
excellent survey which the reader is encouraged to see. The results
of recent research which are summarized below find education to make
positive contributions to many types of non-market activities involv-
ing significant cognitive or education-related affective attributes,
activities such as maintaining the health of family members, earning
a higher rate of return on savings , improving the children's school
achievement and pre-school IQ, increasing the efficiency of household
purchasing, and staying out of jail. Some studies find education

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counterproductive for Che more mundane household (and workforce) tasks,
inducing time to be shifted away from those tasks where education con-
tributes less to productivity, such as dishwashing, mending, ironing,
and the more time-intensive aspects of child rearing — e.g., Lemennicier
(1978) and Levy-Garbona (1978), analogous to similar counterproductive
effects found for analogous time-intensive tasks in the workplace
found by Rumberger (1981), Levin, and others.

The following focuses on those studies that control in some way
for the purely market benefits of education to avoid double counting
the satisfactions secured through the use of education in the work-
place. This summary excludes non-monetary satisfactions on the job,
e.g., Duncan (1976), since these derive from the use of market time.
The private consumption benefits from education considered below ex-
clude externalities and spill-over benefits which accrue to the
society (or to other jurisdictions) above and beyond those that ac-
crue to the individual — both are treated in separate articles. We
will also focus on these microeconomic studies that test for measurable
non-market effects — there is some work on the macro level, however,
by Eisner (1981), McMahon (1981), and Kendrick (1979) that expands
imputed values in the national income and product accounts to include
an imputed value for the services of the education of homemakers in
total consumption and hence in total product and total productivity.

I. Research on Measured Consumption Benefits
Consumption benefits of education can be regarded as those that
fall within the "new theory of consumer behavior," even though most

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occur later in Che life cycle and therefore can alternatively be viewed
as a non-monetary return on an investment. Higher earnings are a pure
investment return, however, and hence are considered separately under
investment returns and under expected rates of return to education
(which see), by Psacharopoulos (1973), and by McMahon and Wagner (1982)).
In considering consumption benefits, those studies will not be included
that do not eliminate the benefits from education due to higher earn-
ings.

Pure current consumption effects are the current satisfactions en-
joyed when schooling itself is enjoyable — particularly at high school
and college levels and in leisure-time courses — plus current services
provided by local schools to the family such as hot lunches, community
center services, and child care. Although these can be observed, little
has been done to measure them beyond one study by Lazear (1977) and as-
pects of some cost-benefit studies of day-care services by Gustafson
(1978) and others. More work on this is needed.

Health. There is strong evidence that education contributes to
better health. Numerous studies show that education is highly correlated
with good health, and highly significant work by Grossman (1976) con-
siderably refines this. He controls for the individual's income, IQ,
health status as a teenager, and wife's schooling, to find an effect of
education on health status by age 46 that is about 40% as strong as the
effect of education on wages. He finds that the wife's schooling has
an even bigger positive effect on the man's health than does his own
schooling. Those with more education live longer; each additional
year of schooling lowers the probability of death by 0.4 percentage

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points. Lando (1975) finds less work disability, and in a later study
Grossman (1982), again holding income and other factors constant, finds
that the children of more educated women tend to have healthier teeth,
are less likely to be anemic, and are less likely to be obese. Al-
though the positive effects of schooling on the individual's own health,
of the wife's schooling on her husband's health, and of the woman's
education on the health of her children are now well documented,
nobody yet has studied the effect of the education of the husband on
his wife's health.

Effects on Further Learning. Leibowitz (1974), using Ben-Porath's
well known model of the household production of human capital over
time, that a mother's education and pre-school home investments in

A

children significantly raise the child's IQ. Benson (1982) finds that
high SES families tend to limit TV viewing and pay more attention to
whether or not the child does his homework, a factor positively
related to school achievement. The number of years of college planned
by white male and by black male college freshmen has been found by
McMahon (1976, p. 322), after controlling for family income, ability,
and all financial aids, to be positively influenced by the education
of the parents.

Ben-Porath neutrality implies that the young person's past education
is productive in further education as every school admissions officer
knows, but also that this is only at the cost of its equal productivity
in the market. This is not an issue when considering the productivity
of education in the home during leisure time hours however (since in
this case there are no foregone earnings), or as the education of the

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parents contributes to the further education of the child in exchanges
within the family.

Returns on Savings. Solomon (1975) finds that the level of educa-
tion among respondents in a survey of members of the Consumers Union,
after controlling for income and occupation, has the strongest relation
to choosing the best inflation hedge for their savings.

Consumption Behavior. Michael (1972, 1982) finds that those con-
sumers with higher levels of education shift their spending patterns
among consumption items, behaving as if they have more real income,
(over and above the higher money earnings that they also have). He
estimates this real income effect of schooling on non-market production
of consumption satisfaction to have an elasticity of .5, an effect about
60 percent as great as the comparable relation of schooling to money
earnings.

Expected consumption benefits also appear, in preliminary evidence,
to average 50-60% of the monetary returns expected by students from
their higher education. When 5,000 students were each asked to appraise
the value of the non-monetary, leisure time returns to them, relative
to the expected monetary returns, McMahon (1974) finds that students
in fields like music placed the expected non-monetary returns above
the expected monetary returns, and those in medicine and business
tended to place them at far less. McMahon (1982) also finds that
expected earnings tend to have the relatively stronger influence on
most student and family educational investment decisions, an influence
that is even more pronounced at the more advanced levels.

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But within the sphere of non-market behavior, education is more
productive in some household activities than in others. Bertrand
Lemermicier (1979) challenges Michael's important simplifying assump-
tion that education is technologically neutral among these activities —

dJfows
an assumption that eventually had to be challenged — which schooling

to affect the relative price of time within the household. He finds
that this causes time to be shifted away from those types of activities
which are time-intensive, so that in these activities education is
counterproductive. //e findj; for example, that a very large propor-
tion of the time budgets of French housewives is occupied by dish-
washing, and although he agreejwith the positive effects of educa-
tion on health, schooling, and saving behavior which require cognitive
and affective skills, the overall shifts away from dishwashing, mend-
ing, ironing, and analogous activities in the time budgets of the more
educated French housewives leads him to conclude that education is
counterproductive in these forms of household production. This is
consistent with the now numerous research studies by Gustafson (1978),
Levy-Garbona (1978), Ferber and McMahon (1979), and others documenting
the time shifts of the more educated women in Sweden, France.-Jthe
U.S., toward entry into the labor force.

Home Management . The simultaneous technological revolution within
the home however may require even less time-intensive labor and in-
creasing levels of education for effective home management using fewer
hours m The rapid swing to dishwashers, automatic washing machines,
wash and wear clothing, and monthly bill paying by check require less
time than the earlier methods. But they do require knowlege of home

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repairs and repair management, plus some accounting skills. Tele-
shopping for groceries and sundries is now in use in 217 U.S. cities,
tele-bill paying and tele-banking are spreading, and Apple computers are
now available at increasingly reasonable cost for managing household
energy use, adjusting savings portfolios, teaching the children, doing
the income tax, and even life-cycle planning — -all requiring more (and
changing) education for their effective use.

There are many studies, not all accompanied by adequate controls
for differences in money income, that offer evidence that those with
more education tend to adopt new products more quickly. Of those that
do attempt to hold real income constant, Mandell (1972) finds that
those with more education adopted credit cards faster, Michael (1982)
reports on several studies including his own that indicate that more
educated women are more likely to use contraception and to have fewer
"unwanted" births; and Hettich (1972) finds that more educated women
are more efficient in market search, with potential savings as the re-
sult of more efficient purchasing behavior that raises the estimated
rate of return to a college education by 1.5 percentage points.
Nobody yet has studied whether or not persons with more education
realize more of the deductions to which they are entitled on their
income tax.

Affective Attributes Created By Education, as distinguished from the
more cognitive attributes, affect productivity in consumption in addi-
tion to their affect on earnings.

The clearest measures are of the comparative advantage schooling
confers in the selection of a desirable spouse. Michael (1982) develops

the point that own-schooling and the schooling of one's mate are posi-
tively correlated by at least .4, making education a good investment in
securing a spouse whose earning capacity and presumably other attributes
are more desirable. The amount of college education planned by students
is also found to be positively and significantly related to "finding a
spouse with college values" in a study by McMahon (1982b), who controls
for expected monetary returns, as well as for financial aids and other
influences on student decisions. It is interesting that the coefficient
for this expected non-monetary return is four times as large, and the
t-statistic is twice as large, for men as it is for women students.
Benham (1974) and Welch (1974) find that a wife's schooling raises her
husband's annual earnings by about 3.5%.

Such affective returns from education as meeting and conversing with
more interesting people, capacities for entertaining guests, and com-
munity service (although the latter is an external benefit discussed
elsewhere) are recognized by students and expected to be positive,
although only meeting more interesting people was found by McMahon
(1982b) to have significant effects on student decisions. Becker
(1981, Ch. 4) suggests that schooling can contribute to greater happi-
ness in marriage since it facilitates a more nearly optimal sorting
among mates in the marriage market. But women with more education
also are more prone to divorce, generating disutilities for the hus-
band and children, a fact that Becker (1981, p. 231) and others have
usually associated with the growth in women's earnings that lessen the
economic advantages of marriage rather than with education per se.

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Education facilitates readjustment for divorced persons with more
education who are known to remarry more quickly. Also in the broader
role stressed by Schultz (1975), it allows individuals to adapt more
easily to changes on the job, disequilibria in the market, and new
technology in the home. It also changes tastes — from drag racing or
horse racing, for example, toward concerts and reading editorials.
But the net effects of pure shifts in tastes on consumer satisfaction
cancel out to some extent. Rather than concentrate on taste shifts,
the research focusing on the effects on productivity in household
production has been far more fruitful.

In summary, all that goes before suggests that there are now many
good studies offering evidence of positive consumption benefits of edu-
cation— benefits (after holding earnings constant) to the family's
health, schooling, return on savings, purchasing efficiency, home manage-
ment skills, and affective sources of happiness. Against this, the
counterproductive effects relating to divorce and to the time intensive
activities in the home requiring less skill must be netted out. Beyond
testing for additional effects, needed next steps include extending the
work by Michael and others using shadow prices to impute values (both
positive and negative) to each of these non-monetary benefits for in-
dividual families, and also for total consumption and total product
at the macro level in the national income and product accounts. These
would have to include the value of education in facilitating adjust-
ment to disequilibria, whether they be caused by market opportunities,
divorce, or new technology within the family.

Walter W. McMahon
University of Illinois

•10-

Ref erences and Further Reading

Becker Gary S 1975 Human Capital. University of Chicago Press,
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1976 The Economic Approach to Human Behavior. Univer-

sity of Chicago Press, Chicago and London.

1981 A Treatise on the Family. Harvard University

Press, Cambridge, Mass. and London, England.

Benham Lee 1974 "Benefits of Women's Education Within Marriage," in
Economics of the Family, Theodore W. Schultz, ed. , pp. 375-389,
University of Chicago Press, Chicago and London.

Benson Charles S 1982 "Household Production of Human Capital: Time
Uses of Parents and Children as Inputs," in Financing Education:
Overcoming Inefficiency and Inequity, Walter W. McMahon and Terry
Geske, eds., University of Illinois Press, Urbana and London.

Duncan Greg J 1976 "Earnings Functions and Non-Pecuniary Benefits,"
Journal of Human Resources XI, Vol. 4, 462-83.

Eisner Robert and David Nebhut 1981 "An Extended Measure of Govern-
ment Product: Preliminary Results for the U.S. 1946-76," in
Income & Wealth, pp. 33-64.

Ferber Marianne and Walter McMahon 1979 "Women's Expected Earnings
and Their Investment in Higher Education," Journal of Human
Resources , 14 (Summer), 405-20.

Grossman Michael 1976 "The Correlation Between Health and Schooling,"
in Household Production and Consumption, N. Terleckyj , ed. , Columbia
University Press for NBER, New York, pp. 147-211.

1982 "Determinants of Children's Health," National

Center for Health Services Research Report PHS 81-3309 and NTIS
P380-163603.

Gustafson Siv 1978 "Cost Benefit Analysis of Early Childhood Care

and Education," working paper, The Industrial Institute for Economic
and Social Research, Stockholm, and OECD, May 1978.

Hettich Walter 1972 "Consumption Benefits From Education," in Canadian
Higher Education in the Seventies , edited by Sylvia Ostry, Economic
Council of Canada.

Kendrick John W 1979 "Expanding Imported Values in the National In-
come and Product Accounts," Review of Income and Wealth (December),
pp. 349-362.

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-11-

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-12-

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