25/09/2011: Returns to Education in Europe

CEPR working paper No. 8568 (link) "RETURNS TO EDUCATION ACROSS EUROPE" by Daniela Glocker and Viktor Steiner, published last week, provides some interesting (and intuitively consistent) evidence on the overall structure of the market returns to education.

Education is generally considered to be a key driver for economic growth and as such forms a specific target in many policy programmes for growth and development, such as the Europe 2020 strategy.

Since the seminal work of Gary S. Becker (starting from his 1960s papers) from an economic perspective, "the optimal level of education depends on the returns to education". Individuals invest in education if the life-time returns to education exceed the cost. These returns drive at least some of the differentials in education outcomes found across the countries. The CEPR study compares "the private returns to education across selected EU countries to explain cross-country differences in educational attainment."

The analysis is based on the 2008 panel data from the EU Statistics on Income and Living Conditions (EU-SILC) which provides comparable micro data for the member states of the European Union. The authors "estimate separate augmented Mincer-type wage equations for Austria, Germany, Italy, Sweden and UK, countries which differ significantly regarding both their education system and labour market structure."

"While the Austrian and German educational system are broadly similar and differ significantly in terms of enrollment rates in higher education from the other countries considered here, labour market outcomes in the two countries are quite distinct. Whereas Austria's unemployment rate is persistently one of the lowest in the European Union, Germany has one of the highest rates. Italy also features a relatively low enrollment rate in tertiary education, but does not have the system of vocational training prevailing in Austria and Germany which is said to be an important factor contributing to the relatively low levels of youth unemployment in these two countries. While Sweden and the United Kingdom both have relatively high enrollment rates in higher education, its financing differs significantly between these two countries and they also differ markedly in terms of labour market outcomes."

Table below - reproduced from the paper - summarizes some of the difference in outcomes across various countries.


The study estimates returns to education by country and by gender. Across countries the study finds that:

• The direct effect of education on wages is positive and significant for all countries.
• Education has a negative effect on unemployment duration, with effect being the strongest in Germany, and lowest for Swedish men where it is not statistically significant.
• The probability of an unemployment spell is lower by up to 23 percentages points, for those with 16 years of education (university level) relative to those with nine years of education (basic education). The highest decrease in probability of unemployment spell is observable for German and Austrian men, and the lowest for Swedish men and women.
• Similarly, the unconditional expected length of the cumulated unemployment declines with education. "For German men the decrease in the expected unemployment duration is the highest with six months, and the lowest for Swedish women"
• Wage decreases due to time spend in unemployment reduce hourly wages in Germany, Austria and Italy, so that "education has an indirect effect on wages in these countries."
• "The returns to education are positive and significant for men. Comparing the gross returns to education across countries, the UK has on average the highest returns to education with an increase in the hourly wages by 9 percent with an additional year of education. Sweden has the lowest gross returns to education with 4 percent."
• "The effect of the expected cumulated unemployment duration is negative, but not statistically significant for Sweden and the UK. Although the level of schooling has a significant effect on the cumulated unemployment duration in the UK, the expected cumulated unemployment duration itself has not a significant effect on wages. The indirect effect of education on wages through the channel of the cumulated unemployment duration is the highest for Germany."
• Focusing on the net returns broadly confirms the above results for gross (pre-tax) returns. "A slight change occurs when comparing Austria and Germany. While Austria has slightly higher gross returns (7.2 percent compared to 7 percent), Germany has with 6 percent 0.2 percentage points higher net returns. Looking how the returns to education change when comparing gross and net hourly wages, the UK has, on average, the highest reduction, i.e. by roughly 2 percentage points. In Austria, Italy and Germany, the respective net returns are approx. one percentage point lower than the gross returns. Sweden shows the smallest change with 0.7 percentage points. Interpreting this difference between gross and net returns as the "social return to education", the UK benefits the most from a high level of education in the population."
• "For women [data shows] significant positive returns to education as well. As for men, the cumulated unemployment duration is significant for Austria, Germany and Italy. The combined gross as well as the net returns to education is highest for UK and Austrian women with 9 percent (and 7 percent when considering the net returns). As for men, Swedish women are estimated to have the lowest returns with respect to education."
• "Comparing the returns of education by gender across countries, [the study] finds that there are no significant gender differences in the UK. While the returns are slightly lower for women in Germany and Sweden than for their male, the opposite is true for Austria and Italy."