Measuring the Economic Output of the Education Sector in the ...

aggregate enrolments between the two approaches. For the income-based approach,
enrolments are disaggregated by gender, education level (one of five levels), and age (age 6 to
74). The five education levels are defined as: 0−8 years of schooling; some or completed high
school; some or completed postsecondary school below bachelor’s degree; bachelor’s degree;
and master’s degree or above. For the cost-based approach, enrolments are disaggregated by
three education levels (primary and secondary, college, and university). This disaggregation is
determined by the availability of data on education expenditures.
3. What are the estimates of the nominal value of the output of the Canadian education sector
from the two approaches?
The nominal value of education output from the income-based approach is set equal to the
value of education as measured by its effect on students’ lifetime income. The nominal value of
education output from the cost-based approach is derived from total education expenditures,
which include the labour costs of teachers and administrative staff, capital costs, and
intermediate inputs.
The income-based estimate of the nominal value of education services is found to be much
higher than the cost-based estimate. In 2005, the income-based measure was estimated at
about 6.8 times as large as the cost-based estimate.
There are a number of potential explanations for this difference. First, the coverage of the
education sector differs between the two approaches. The education services sector in the
income-based approach includes the inputs of non-market activities (the opportunity cost of
students’ time), while the cost-based approach does not. Second, the income-based approach
attributes the earnings differentials among individuals to the effect of investment in formal
education (Rosen 1989). To the extent that the earning differential also captures the effect of
on-the-job training, gender discrimination, and individuals’ ability, the income-based approach
overestimates the level of education output.
Despite these differences, the two estimates generate quite similar rates of growth of real or
volume measures.
4. What are the main challenges for measuring the output and the productivity performance of
the education sector?
The measures of the output of the education sector developed in this paper represent an
important first step towards understanding the productivity performance of the education sector.
However, significant challenges remain. Chief among them are the changes in education quality
that must be taken into account in order to accurately estimate the productivity performance of
the education sector. While the hedonic method can be applied in order to take into account the
quality changes in education output as shown in the paper, the data for implementing quality
adjustments are often not available or incomplete. The challenge facing statistical agencies is to
collect time-consistent data on the various indicators of education quality (such as class size,
test scores, and teacher quality) and to conduct surveys that can be used to estimate hedonic
regressions that link the indicators of education quality to the unit price of education output in
terms of the value of education or expenditures of education.
Economic Analysis Research Paper Series - 8 - Statistics Canada – Catalogue no.11F0027M, no. 080