Education System Permeability

This paper proposes a model of returns to education based on the permeability of the education system. We define permeability as the availability of different program types up to the highest education levels and the ability to transition between programs (Caves et al., 2023). We develop six permeability models that reflect variation in the availability of programs and transitions. Building on Heckman et al. (2006)’s work on returns to education by skill type, we formulate a model of returns to education in each type based on skill types and schooling type. We then specify this model for each permeability type. We use a Monte Carlo simulation to demonstrate how the model performs for each permeability type as we progressively relax assumptions. We find that education system permeability is necessary but not sufficient for maximizing individual returns to education, especially for individuals whose latent skill profiles are more aligned with the non-dominant type of education. Population skills are also higher in higher-permeability systems. We further find that high overall ability cannot compensate for the “wrong” skill type in a low-permeability system. After considering the literature, we show that permeability is also necessary for the accurate comparison of program types and that permeability increases the attractiveness of non-dominant programs by increasing further education opportunities. Program quality is crucial since permeability does not yield effects on its own, but a high-quality program cannot overcome the limitations of a low-permeability system.