Measuring Returns on Investment in Education: Lessons for Sustainable and Innovative Education Policy

Hatidza Jahic,Amila Pilav-Velic

doi:10.7906/indecs.19.2.2

Hatidza Jahic, Amila Pilav-Velic

Open Access

https://doi.org/10.7906/indecs.19.2.2

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Abstract

The relationship between education and labor market is significant and complex. Education increases employment opportunities and reduces the chance of occurrence and duration of unemployment. Earnings, among other things, represent private returns on investment in education and are in the center of the analysis of this article. The main aim of this article is to estimate private and social returns on investment in primary, secondary and tertiary education in selected old and new member states of the European Union (EU) by using two methods (Earnings function and Short-cut method) based on the Mincer equation. Results have shown that there is no statistically significant difference between the estimated private and social returns on investment in primary, secondary and tertiary education in groups of old and new EU members. New members converge towards the old members, at least when it comes to returns on investment in these three education levels. The results also indicate the existence of low and negative returns on investment in education in both old and new EU members. Thus, this article with its new findings contributes significantly to the literature that studies the universality of conclusions on returns on investment in education and the methodology that is used.

Highlights

The analysis of the relationship between human capital and economic growth has been in the center of attention of scientists since the second half of the last century
[13] sees the greatest contribution of the new models in the fact that economic growth can grow indefinitely because the returns on investment in human capital will not fall with the growth and development of the economy as assumed in earlier theories. [14] who emphasizes the “economic importance of human capital, especially education,” in economic growth and who believes that “only a small portion of growth and income can be explained by available physical capital”, and [15], for whom education is a key factor which leads to the realization of different levels of wages in the labor market are among key authors of Human Capital Theory
Estimated returns on investment in education in the European Union (EU) member states indicate the existence of a gap between the old and new members of the Union and the absence of a significant increase in the return on investment in education

Summary

Introduction

The analysis of the relationship between human capital and economic growth has been in the center of attention of scientists since the second half of the last century It is only with New Economic Growth Theories, especially Human Capital Theory, that human capital becomes involved and becomes one of the key factors in explaining the process of economic growth as seen in [1,2,3,4,5,6,7,8,9] and others. A significant contribution is reflected in the promotion of the idea that investing in human capital has multiple positive effects on both the individual and society as a whole These effects have been termed human capital externalities in research [10,11,12] point out that investing in human capital leads to technological progress and innovation, and increases the productivity of other factors in the growth process. Individuals invest in education. [1, 15,16,17,18], and [19,20] argued that all consumption aimed at improving productivity is an investment in human capital. [20; p.161] states that of all these investments, the most important is the investment in education and that “rates of returns are the best and most comprehensive way to measure the economic effects of education”

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