1 Micro: Labour Markets

The effect of education on wages and employment on the labour market remains a central topic of the economics of education. Microeconometric estimations of rates of return to investments in education reveal how much of an effect each additional year of education has on individual wages, bringing together the costs of education with the future benefits on the labour markets, which is the core concept of human capital theory. The expertise of our network members with regard to this subject area is outstanding, most of all including Psacharopoulos’ numerous and much-cited studies in the area (e.g., Psacharopoulos 1994). Psacharopoulos also made a leading early contribution to the literature showing that estimated returns to education indeed reflect a productivity-enhancing effect of education and not just its screening effect as a signal of pre-existing ability (Layard and Psacharopoulos 1974). Further leading contributions include Oosterbeek’s survey, specifically including European evidence (Harmon, Oosterbeek and Walker 2003; cf. also his work on the Netherlands, Oosterbeek 1990), the estimates for specific European countries by Brunello, Hartog and Wolter in Harmon et al. (2001), the estimates for acceding countries by Münich, Svejnar and Terrell (1999) and by Jurajda, Filer and Plánovský (2000), and many other studies by members of the network, including several with a comparative perspective.

During the years of EENEE’s first contract phase our network members have continued working on this issue: Psacharopoulos and Patrinos (2004) review more than 40 years of estimating returns to education and Münich, Svejnar and Terrell (2005a) evaluate the returns to education under the communist regime and during the transition to the market economy. Oosterbeek and Webbink (2007) explicitly study the wage effects of vocational education (see also topic 5). In contrast to the majority of studies dealing with wage-level effects of education, Brunello, Fort and Weber (2009) focus on the effects of education on the wage distribution using data of 12 European countries. De la Fuente and Jimeno (2009) estimate both private returns to schooling but also fiscal returns including effects of attianment on public finances.

Education does not only affect wages, but also the chances of finding employment, as can be seen in the pattern of long-term unemployment in Europe (Machin and Manning 1999). Empirical evaluations can reveal the success of different active labour market policies that try to counter this employment effect by specific education programmes for low-skilled youth and by on-the-job training (e.g., Fougère, Kramarz and Magnac 2000 for youth employment in France). Recent technological changes seem to have been particularly skill-biased, increasing the demand for educated manpower relative to low-skilled workers (Machin and van Reenen 1998; Berman, Bound and Machin 1998, Machin 2004, Machin and van Reenen 2008). Furthermore, there seems to be the danger of a serious brain drain from Europe with many of the best-educated people leaving to find jobs elsewhere (cf. Becker, Ichino and Peri 2003 for Italy). This is corroborated by Oosterbeek and Webbink (2009) who find that better students have a higher probability to study abroad and to currently live abroad.

Research of the last years has shown that it is rather educational quality (as measured by cognitive tests like PISA or TIMSS) than quantity (as traditionally measured by years of schooling) that accounts for wage, employment or even growth effects (see also topic 3) of education. Hanushek and Woessmann (2008) review the literature on the relevance of cognitive skills with a special focus on development countries.



1a Rates of return to education, costs and benefits
1b Externalities and non-market effects of education
1c Employment and demand for skills, skill-biased technological change