The Free Compulsory Education Law in Israel, and Liquidity Constraints

08/07/2008 |  Kriaf Tomer
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Welfare Policy and Labor Market
Tomer Kriaf
In the course of the 1970s the Compulsory Education Law was amended several times, with the changes expressed in an increase in the number of years of compulsory education and in the number of years of free education. This process led to a sharp reduction in the drop-out rate among students from ninth to twelfth grades in schools, mainly among oriental Jews and the non-Jewish population. The fact that in those years compulsory education and free education were implemented independently enables us to examine what is the effective constraint that prevents some individuals from continuing their studies. To examine this issue, the author performed a comparison between the "compulsory" effect and the "free" effect on the extent of education and on the return to education. It was found that the extra years of compulsory education resulted in a sharp decline in the drop-out rate in the additional grades that had been added (ninth and tenth), and a moderate reduction in the drop-out rate in the later grades (eleventh and twelfth), which were not compulsory or free at that time. The application of free education to the eleventh and twelfth grades also reduced the drop-out rate, mainly among female students. Another finding was that the return, in terms of the wage, deriving from the additional years of compulsory education was no different from the return deriving from the addition of extra years of free education, and that both gave returns similar to that for secondary school education estimated by the OLS method. These findings indicate that there exists a liquidity constraint that prevents some individuals from making the optimal investment in their human capital. This constraint, based on the findings, is not just the outcome of the need to pay tuition fees, but also apparently derives from the framework in which family decisions are made, which does not necessarily take into consideration the utility that the individual will gain from more education.
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