Investment in Education Pays Off – Also for Public Budgets

It pays off for the German government to invest in vocational training and higher education. The contribution of workers with vocational training or a university degree to public revenues through taxes, levies or reduced transfer payments over the life cycle exceeds, on average, the amount that the state previously invested in their education. This is the result of a recent study conducted by the Centre for European Economic Research (ZEW) on behalf of the DIPF | Leibniz Institute for Research and Information in Education, Frankfurt/Main, for the National Report on Education 2018. The study considers net earnings and returns on education investments, and compares the findings with previous ZEW research findings.

Every worker who has completed professional education contributes an average of 153,000 EUR (present value for 2016) to public budgets. This number is based on the income individuals earn over the course of their working life until they reach the age of 66, and is considered in contrast to individuals without vocational training and for training programmes completed between the ages of 17 and 21. Considered up to an age of 66, individuals with a high school and university degree, acquired between the ages of 17 and 25, contribute, on average, a net amount of 236,000 EUR (present value for 2016) when compared to individuals without professional education.

The authors of the ZEW study estimate both the present value of fiscal net revenues as well as fiscal returns to investments in education. When compared to individuals without vocational training, educational training yields an average return of 20.6 per cent and the combination school/university yields an average return of 10.2 per cent. The study indicates that successfully completing four-years of vocational training enables people to earn higher wages and salaries in their working live that significantly reduce the amount of public transfer payments. This reduction particularly benefits public budgets, since it lowers the amount of social expenditures and facilitates relatively high fiscal returns. Due to their long duration, nine-year investments in the combination school/university are more pronounced. These investments, however, still pay off – as they result in significantly higher taxes flowing into public treasuries over the life cycle. The figures refer to the year 2016 and take into account the legal status of taxes, levies and government transfers in 2018.

Comparison with previous findings reveals mixed picture

In a previous analysis, the authors of the ZEW study had already estimated returns to education and net earnings for the year 2012, using the legal status of 2014 as a basis. The comparison shows that returns to investments in vocational training programmes seem to have increased slightly in the period between 2012 and 2016, whereas returns to education for those holding university degrees experienced a moderate decline.

“This development could be due to the fact that the trend of rising wages for university graduates – which has been apparent for the last 25 years – has slowed down in the past few years, possibly because the expansion of higher education over the past 15 years has led to more graduates entering the labour market,” explain Friedhelm Pfeiffer, acting head of the ZEW Research Department “Labour Markets and Human Resources” and Holger Stichnoth, deputy head of the ZEW Research Department “Social Policy and Redistribution”. “In light of the ageing of the population and the decline in the younger birth cohorts, however, it currently seems unlikely that skills premiums will fall,” says Pfeiffer. “Instead, it is more likely that the ongoing scientification of production and social life will require additional investments in education.”

Individual returns to education remain attractive despite taxes

Within the framework of the study, the authors also calculate the individual net earnings and returns that gainfully employed persons can achieve through vocational training or university level education. While the individual returns to education in relation to gross income are over ten per cent, they shrink on average to 6.4 per cent after deduction of taxes and social security contributions as well as transfer withdrawal for individuals with vocational training, and to 6.2 per cent for the combination school/university. “These figures refer to disposable income and are still rather attractive compared to other investments,” says ZEW labour economist Friedhelm Pfeiffer. They illustrate that from an economic perspective it makes sense for individuals to invest in their own education in the longer run. Public investment in education should primarily focus on these longer-term returns. These investments should provide young people with a good basis for living as self-determined a life as possible in the face of an unknown future characterised by ongoing social, technological and economic changes. The ZEW analysis further shows that education, tax and social policy are closely intertwined and should not be viewed in isolation.

According to the ZEW research findings, investments in education have, on average, a distinctly positive effect on financial returns – this holds true for public budgets as well as for individuals. “Investments in education should, however, not only be made if or just because public budgets stand to benefit from them. Rather, the task of modern education and fiscal policy is to provide all children and young people with education investments that are optimal on an individual level. The extent to which this goal is achieved remains a largely unresolved research questions,” conclude the ZEW economists Friedhelm Pfeiffer and Holger Stichnoth.

The estimations were made on the basis of the ZEW micro simulation model, which considers representative data from the German Socio-Economic Panel (SOEP) of 2016. The ZEW micro simulation model calculates income tax payments, social security contributions and transfer entitlements for each person in the sample, taking into account the current legal status. Payments, contributions and entitlements can differ depending on the age, sex, marital status and level of education of the individuals. Along with official education statistics, this database forms the basis for estimating fiscal and individual returns to investments in education. The study not only considers phases of full-time employment, but also phases of part-time employment and inactivity, including unemployment, retirement or parental leave.

For more information please contact

PD Dr. Friedhelm Pfeiffer, Phone +49(0)621-1235-150, E-mail friedhelm.pfeiffer@zew.de