Private & Fiscal Returns

of Education in Spain and

its regions
De la Fuente & Jimeno (2011)

Marta Sobrino Yáñez

Israel Martínez Hervás
Economics of Education
2022-2023
 TABLE OF CONTENTS
Fiscal returns
01 Introduction 05 of Education

02 Methodology 06 Findings

Econometric ➢ School failure

03 model ➢ Novelties for the literature

Private returns of
04 Education 07 Conclusions
01 INTRODUCTION
● WHAT? Estimates of the private returns to
investment in education by region & educ level and
their implications for public finances.

● HOW? Methodology developed in de la Fuente &

Jimeno (2009)

● WHERE? SPAIN

● WHEN? Year 2006

● Data from Encuesta de Población Activa (EPA) &

Encuesta de Estructura Salarial (EES).
 02 METHODOLOGY
developed in de la Fuente & Jimeno (2009)

To calculate the private and fiscal returns to education, they use

● econometric estimates of wage, participation and employment

equations estimated with individual data & public and private
educational expenditure per student together with a school failure
indicator.

● average and marginal tax rates faced by different types of agents as

well as the unemployment benefits and pensions to which these
agents are entitled depending on their wages and the sensitivity of
these benefits to wage increases.
 02 METHODOLOGY
developed in de la Fuente & Jimeno (2009)

PRIVATE RETURNS to an additional year of schooling:

● Continue studying is a trade-off between present costs and future
benefits (↑ expected wage level & ↑ prob of employment).

Internal rate of return: discount rate that equals the

discounted present value of the relevant streams of
marginal costs and benefits.
 02 METHODOLOGY
developed in de la Fuente & Jimeno (2009)

FISCAL RETURNS an additional year of schooling:

● ↓ current tax revenues & ↑ public spending but, by ↑ wages &
probability of future employment, it ↑ future tax revenues and
spending on contributory pensions and ↓ unemployment benefits.

Fiscal rate of return of the long-run budgetary

incidence of educational investment or, the NPV of the
investment at a given discount rate.
 ! DISCLAIMER
made by de la Fuente & Jimeno (2011)

1. Rates of return capture average return of an additional year of

schooling holding its cost and quality constant at observed levels.

Tell nothing about the returns to possible increases in spending aimed at

improving the quality of the education system.

2. Interregional mobility: effects of education on wages & employment

rate observed at their place of work, not necessarily same region in
which their human capital was acquired .

Mobility: regions w/ lower returns -> regions w/ higher returns

overestimation underestimation
 03 ECONOMETRIC MODEL
Standard Mincer earnings equation
(with Weighted Least Squares)

● Dependent variable:
○ Wi = gross per-hour salary of individual i

● Independent variables:
○ Si = years of schooling
○ potexpi = potential experience (starting when worker i finishes studying)
○ Dsexoi = gender of individual i (binary)
○ Dinmi = immigrant identificator (binary)
○ Dcarbóni = workers engaged in the extraction of energy products (binary)
 Mincer earnings equation: estimations of economic effects of education
Specification #1 Specification #2
Dependent variable: years of schooling Dependent variable: levels of education
Effects of education on… Effects of education on…
wages participation employment wages participation employment
 04 PRIVATE RETURNS OF EDUCATION
Gross Subsidies Taxes Unemployment Net Net Gross

Public interventions to private returns to education

return benefits return potential potential
NO GOV OBS return return

[1] [2] [3] [4] [5] [6] [7]

Direct Cost Total Private Private Private Private Private Total

Taxes X X X X

Unemploy- X X X
ment benefits

Pensions X X

School failure X X X X X

S’(X0) = approx marginal contribution of time spent in educ system to academic progress
 04 PRIVATE RETURNS OF EDUCATION
Private returns of education

● Mincer results by regions seem to approximate to

a weighted average of all educational levels.

By region
● The results by educational levels are more
reliable than the "average" estimates by regions,
since the latter are surely biased downwards
because the (low) returns of lower educational
levels.

By level of
education
04 PRIVATE RETURNS OF EDUCATION
[1] Gross return (No Gov), [5] observed returns & [6] observed returns w/out
school failure (net potential returns) by non-compulsory educ levels

➔ The performance of the public sector translates into a positive

subsidy for educational investment, and school failure
significantly reduces the average returns on such investment.
 05 FISCAL RETURNS OF EDUCATION
Net public cost of one year of schooling (NPV)
● Partial vs. general equilibrium
● How is the net cost of 1 year of
schooling calculated?
○ NPV: direct spending - increase
of tax collection

By region
● INTUITION: an additional year of
schooling today increases tax revenue
tomorrow throughout worker’s life
○ ↑e, ↑tax, ↓unemp. benefits

By level of
education
● Column 5: observed total cost
○ Columns 1-4: cost
decomposition

● Column 6: cost of school failure

as % of direct cost
 06 FINDINGS: School failure
Observed Without school
failure

By level of
education
● School failure = dropouts & repetition
● INTUITION:

1. Direct costs: ↑years, = level, ↑cost

2. Decrease of future tax revenue:
Coverage ratio of public spending on education
2.1. Work lifespan
Direct Unemployment School
2.2. Average fiscal contribution subsidies Taxes benefits Pensions TOTAL
failure

Lower PRIVATE and FISCAL rates

of return

Change in private returns of education induced by different

public policies
 06 FINDINGS: Novelties of literature
D&J (2009) estimated a gross return of 8.91% for Spain,
reduced to 4.18% in D&J (2011). WHY?

Improvement of the calculation of S', which raises the

estimate of the school failure rate.
In 2011, use of more detailed national data than the OECD statistics used in
D&J (2009), making it possible to take into account the effect of the high
1º
Spanish repetition rates on S'(Xo) whereas in our previous work S'(Xo)
estimated from an indicator of the dropout rate.

Change in the design of the EES sample: 2002 survey only included establishments
with ten or more workers, 2006 survey includes smaller establishments too. The
2º larger sample tends to reduce the estimated value of the coefficient of
Mincerian returns and thus the estimated return of education.

BUT consistent results with other studies: decreasing trend in the rate of private returns
to education in Spain during the last decade (e.g., Izquierdo and Lacuesta, 2006 and
Carrasco et al., 2011)
 07 CONCLUSIONS

Private rate Private returns No big regional

of return of are significantly differences
education in higher in Yet, regions with highest
Spain (2006) non-compulsory private rates of return:
was 5% Extremadura, Asturias,
education levels Cataluña, Galicia, Madrid &
País Vasco

Increase in tax collection School failure

derived from one additional reduces 2-4.5
year of education
percentage points the
compensates a large share
private rate of
of public direct spending
on non-compulsory levels of return of secondary
education & college education
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