Nova workboard

a blog from young economists at Nova SBE

Public investment in education

In OECD’s publication Education at a Glance 2014 it was once again found that Denmark was the OECD country that spent the largest share of its wealth on education with a total expenditure on institutions of 7.9 pct. of its GDP in 2011. The following graph breaks down the public costs and compare it to the public benefits for a woman and man respectively attaining tertiary education in comparison to the OECD average.

Publiccostbenefit

The first thing that sticks out is how the Danish public sector actually looses money on a woman attaining tertiary education – it has a net cost of nearly 65.700 equivalent USD when you look at NPV. Men’s attainment on the other hand gives a little surplus of 28.500. For both cases it is less beneficial for the public sector having either men or women attain tertiary education relative to the OECD average. Can this be a sign of inefficient use of public funds in Denmark? And if so, is it a problem?

From a theoretical point of view a high degree of public spending could actually lead to a population educated above the efficient allocation. The economic intuition being that when individuals make the decision of how much education to take on they (in theory) weigh the benefits over the cost and when the education is funded by the taxes their direct cost of attaining additional education has decreased. Their private optimization problem causes thereby a higher than social optimal level of education because they do not take into account the public spending on the area.

The above could be a possible explanation for the overall relative small benefit – making 40 pct. of the young population (aged 25-34) that had a tertiary education in 2012 being too many. The public cost-benefit analysis from OECD though only takes into account the purely economic dimensions of attaining education and not that it also entails side effects that can benefit society. Different studies have shown that education among other correlates negative with crime, can increase economic growth, strengthen health and in general that it boosts civic activities. As with a lot of social science studies the causality is not 100 pct. established since it is hard to get rid of endogeneity problems, but the correlation is there and it seems reasonable to me to assume that it is not spurious.

Finally Denmark’s large public spending on the educational system shall also be seen in perspective of its in general big public sector. Like in all other parts of the Danish welfare state the objective is to ensure that everyone no matter their social background can seek to attain education to the level at which their abilities can get them. If that makes a couple of people take an education where it might not have been beneficial for them if it was not at (almost) zero cost, then I think it is worth it as long as the economy can bear it, especially in the light of the externalities not taken into account.

#2371

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Author: studentnovasbe

Master student in Nova Sbe

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