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THE IMPACT OF EDUCATION ON UNEMPLOYMENT.

AN EMPIRICAL ANALYSIS FOR EUROPE, JAPAN AND USA.

(1992 – 2006).

Miltiades N Georgiou PhD

ABSTRACT
In the present paper an attempt will be made to point out that government spending
(as a percentage of GDP) on education reduces total economy’s unemployment rate.
For this finding panel data are used covering Europe, USA and Japan (1992 – 2006).
These data are elaborated by means of Eviews software package.

Keywords: Model with Panel data (single equation), Government Education

Spending, Unemployment Rate.
JEL classification: C23, H52, J6.

Dr. M. N. Georgiou has an M.Sc. (Economics) from Stirling University, and a Ph.D.
(Economics) from the University of Thessaly in Greece. He left in July 2008
Emporiki Bank as a Department Head on Market Analysis. He has contributed papers
to: “Hellenic Bank Association”, “Economic Review of Commercial Bank of
Greece”, “Applied Research Review”, “Applied Financial Economics Letters”,
“Max Planck Institute of Economics” (4) and “Social Science Research Network
(SSRN)” (31). He is familiar with Eviews software package

Author confirms that this article has never been published by any other journal.
Further, this article expresses only author’s personal ideas and of nobody else.

Electronic copy available at: http://ssrn.com/abstract=1577130

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PART 1. THEORY

The view that government education spending reduces unemployment is

analysed in the following papers. According to (Miguel St. Aubyn, Álvaro Pina,

Filomena Garcia and Joana Pais, 2009) higher education groups have less

unemployment rates than the less educated ones. This opinion is also shared by

(Lewis, 2004); (Venturini, 2004) and (Eggert et al., 2009). However, an increase in

the level of education does not always lead to higher aggregate total employment

(European Commission, 2003). It should be also noted that over-qualified people have

some difficulties to get a job (Chevalier and Lindley, 2007).

In the present paper however it will be shown that at a country level education

lowers the total economy’s unemployment rate. Hence, the present paper is a reply to

the study of (European Commission, 2003) using more recent data.

Electronic copy available at: http://ssrn.com/abstract=1577130

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PART 2. THE MODEL

Hence our model is shown in equation (1).

U1 it = c0 + c1 edpcgdp it + error it (1)

U1 = ln(U)

Ex-ante c1 < 0

Variable U refers to harmonised long-term unemployment - annual averages (% of all

population). Finally, variable debtgdp stands for the government education spending

as a percentage of GDP. Data source is Eurostat. The subscripts (i) and (t) stand for

the country and year respectively. Data are annual and cover in alphabetical order the

following countries: Austria (1995 – 2006), Belgium (2001 – 2006), Cyprus (2000 –

2006), Denmark (1995 – 2006), Finland (1997 – 2006), France (1992 – 2006),

Germany (1995 – 2006), Greece (1993 – 2005), Ireland (1992 – 2006), Italy (1993 –

2006), Japan (1992 – 2006), Netherlands (1992 – 2006), Norway (2000 – 2006),

Portugal (1995 – 2006), Spain (1992 – 2006), Sweden (1992 – 2006), UK (1992 –

2006) and USA (1992 – 2006). Thus, the unbalanced sample has 225 observations in

total. The equation (1) will be estimated through the software package Eviews using

the method of GLS period weights. The detailed results are shown in table 1, while

the diagnostics, based on Halkos (2003), in table 2.

For Equation (1) there are basically two types of model, the fixed and random

effects. The appropriate choice depends on whether one treats αi’s as some fixed

numbers or ‘random drawings’ from a specific distribution. As the correlation

structure of the error term is ignored, a more efficient estimation method would be the

Generalized Least Squares (GLS) provided that there is no correlation between the x’s

and the α’s. GLS requires weighting the observations of y and x by Σ –(1/2):
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
1 / 2  1   ΄ 
1
  IT  
 ii 
 
 T 
2

where   2
  T 2

First one obtains an estimate θ by estimating the equation:

yit  yi.   ΄ ( xit  xi. )  (uit  ui. ) (2)

Once the component variances have been estimated, one forms an estimator of the

composite residual covariance and GLS transforms the dependent and regressor data

(Baltagi, 2001; Davis, 2002). We observe that the estimated equation (1) meets the

three required criteria of homoskedasticity, specification and normality. Further, there

is no serial correlation. Hence, the above model is robust. The constant term is

positive and statistically significant. The coefficient of debtgdp is negative and

statistically significant, as initially assumed.

PART 3. CONCLUSIONS

Hence, the present paper, regarded as a reply to the study of (European

Commission, 2003), points out with a robust panel data model that government

spending for education decreases total economy’s unemployment rate not only in

Europe, but also in Japan and the United States. This conclusion is based on more

recent data than in the case of (European Commission, 2003).

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REFERENCES

1. Baltagi, B. H. 2001. Econometric Analysis of Panel Data, 2nd edn,

John Wiley and Sons, Chichester.

2. Chevalier, A. and Lindley, J. 2007. Over-Education and the Skills of

UK Graduates. CEE DP 79. London School of Economics. Available at:

http://cee.lse.ac.uk/cee%20dps/ceedp79.pdf

3. Davis, P. 2002. Estimating multi-way error components models with

unbalanced data structures. Journal of Econometrics, 106, 67–95.

4. Eggert, W. Krieger, T. and Meier, V. 2009. Education, unemployment

and migration. Available at:

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1474694&CFID=13246076&CFT

OKEN=40374514

5. European Commission. 2003. European Economy, Number 6.

Available at:

http://ec.europa.eu/internal_market/capital/docs/europeaneconomy_en.pdf

6. Halkos, G. E., 2003. Environmental Kuznets Curve for Sulphur:

Evidence Using GMM Estimation and Random Coefficient Panel Data Models.

Environment and Development Economics 8: 581-601.

7. Lewis, P. 2004. The Australian Labour Market and Unemployment in

2004. The Centre of Labour Market Research. Available at:

http://www.business.curtin.edu.au/files/04_6.pdf

8. Miguel St. Aubyn, Álvaro Pina, Filomena Garcia and Joana Pais. 2009.

Study on the efficiency and effectiveness of public spending on tertiary education.

European Commission. European Economy, Economic Papers Number 390.

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Available at:

http://ec.europa.eu/economy_finance/publications/publication16267_en.pdf

9. Venturini, A. 2004. The jobs and effects of migrant workers in Italy -

Three essays. Employment Department. International Labour Office. Geneva.

Available at:

http://www.ilo.org/public/english/protection/migrant/download/imp/imp11.pdf
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APPENDIX

Table 1. The estimated panel equation

Method GLS Period weights
c0 1,827
(6,18)
c1 -0,200
(-4,30)
2
Adjusted R 0,107
Durbin Watson 1,743
Note: For n = 225 (at 99%) dU = 1,700
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Table 2. Diagnostic Tests1

TESTS EGLS Critical values
(period weights) (at 99%)
Heteroskedasticity 0,271 6,463
Heteroskedasticity 0,116 6,463
Heteroskedasticity 0,273 6,340
Heteroskedasticity 0,879 9,210
Heteroskedasticity 0,516 11,350
RESET1 2,779 6,340
RESET2 3,068 9,210
RESET3 3,357 11,350
Normality 7,850 9,210

Test 1: Regression of the squared residuals on X. That is, u 2t  xt γ1  v t,1

Test 2: Regression of absolute residuals on X. That is, | u t | xt γ 2  v t,2 (a Glejser test)

Test 3: Regression of the squared residuals on Ŷ

2
Test 4: Regression of the squared residuals on Ŷ and Ŷ

Test 5: Regression of the log of squared residuals on X (a Harvey test)

2
Test 6: Regression of residuals on Ŷ

3
Test 7: Regression of residuals on Ŷ

4
Test 8: Regression of residuals on Ŷ

Test 9: Normality test (Jarque Bera)

1
The diagnostic tests are based on Halkos (2003)