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APPENDIX .

APPENDIX . The Procedure for Calculating the Effectiveness of the Investment in Education

In estimating to what degree the educational investment contributes to the increase in national income in Japan, the following process was employed, with reference to the theory advocated by Dr. Theodore Schultz of the University of Chicago. In order to make data for Japan comparable with those obtained in the U.S.A., the data used here were restricted to those of the period between 1930 and 1955.

The following table shows the total national income, the share of national income earned by labor, and the size of the employed labor force in 1930 and 1955.

The national income consists of two parts, one attributable to physical capital and the other attributable to human effort. It is estimated that the percentage of the national income attributable to human effort increased from 60 per cent to 70 per cent between 1930 and 1955 in Japan. In the present calculation an average of 65 per cent was adopted. In the United States of America labor's share increased from 70 per cent to 80 per cent over almost the same period, and Dr. Schultz adopted an average of 75 per cent in his treatise.

National Income and Labor Force

As shown in the table, in Japan the share of national income earned by labor changed from 2,635 billion yen in 1930 to 4,673 billion yen in 1955,an increase of 2,038 billion yen. The size of the labor force increased from 29 to 39 million, arm increase of 34 per cent, over this period. If the quality of labor were constant at its 1935 level, the labor force of 39 million in 1955 would have earned 3,519 billion yen. In reality, however, the labor force earned 4,673 billion yen, or 1,154 billion yen more than was estimated. This increase of 1,154 billion yen seems to be attributable to education and other factors.

The total stock of educational capital invested in the labor force increased from 1,865 to 5,380 billion yen over the period between 1930 and 1955, an increase of 3,515 billion yen. The amount of return on this stock of education of 3,515 billion yen was 808.4 billion yen.

In estimating this amount of return, the most difficult problem is in the determination of the rate of return. In this estimation we applied different rates of return to each level of education: 30 per cent to elementary education, 20 per cent to secondary education, and 10 per cent to higher education. According to Dr. Schultz's estimation, the rates of return to elementary, secondary and higher education are 35 per cent, 10 per cent and 11 per cent respectively in the U.S.A. It seems, however, the rate of return of 35 per cent to elementary education is too high to apply to the data for Japan. As to rates of return to secondary and higher education, almost the same figures have been obtained by the study made by Dr. Terao in Japan.

Taking the percentage distribution of the employed laborers by level of school completed into consideration, it was estimated that the average rate of return to all levels of education was 23 per cent. Applying this rate to 3,515 billion yen, we obtained 808.4 billion yen as a return on the educational investment. This 808.4 billion yen accounts for 70 per cent of the 1,154 billion yen, which is the increase of the national income not explained by the increase contributed by physical capital and the labor force. Thus, 70 per cent of the unexplained increase in the national income is attributed to the increase in the educational investment. As the unexplained increase in the national income is 37 per cent of the total increase in the national income, the amount of the return on the educational investment, which is 70 per cent of the unexplained increase in the national income, represents a little more than 25 per cent of the total increase in the national income.

This rate of return seems to be proper in comparison with 33 per cent in the U.S A., and 30 per cent in the U.S.S.R., though some risk is involved in this conclusion, because the stages of socio-economic growth vary among these three countries. As there remains some imperfections in this exp1oratory estimation, additional studies on this problem are projected.