Asymmetry effects of government expenditure on education and impacts on economic growth.

AuthorKrizek, David
  1. Introduction

    Education is key to the development of the individual and society as a whole. Thus, investment in education is one of the most important for the development of both human capital and the development of society as a whole. The return on such an investment is not immediate, but often long-term, sometimes more than 10 years. The current state of the issue focuses more on the question of fiscal policy aimed at shortterm expansionary goals, but does not specifically address the question of return on investment in education. Although models focusing on the relationship between output (economic growth) and, for example, technological progress have been defined in the past, studies directly addressing the impact of increasing human capital through investment in education on economic growth are lacking. Therefore, the present study aimed to investigate the relationship between investment in education on the changes in the value of gross domestic product as an indicator of economic performance. On the basis of the proven relationship between the effectiveness of these investments (i.e. the fact that investments in education lead to GDP growth over time), it is then possible to recommend in particular fiscal measures leading to further investments in education, development, innovation and expansion of the range of study opportunities in the Czech Republic, as the returns on such investments are proven in the long run.

  2. Literature review

    Over the past decades, human capital has increasingly gained the attention of the professional economic world. The basic principle of capital is the fact that it is a production factor that is itself produced. Human capital is an accumulation of investments in the labour force. Education is the most important type of human capital. Like all forms of capital, even education represents a release of resources at some point in time in order to increase future productivity. However, unlike investments in other types of capital, investments in education are connected with a particular person, and it is this connection that makes human capital what it is (Avilova, 2017; Holden and Biddle, 2017).

    On average, labor with higher human capital earn more than those who have less human capital. University graduates in developed market economies receive up to 2/3 more pay than those who only have secondary education, which is presented in his classic work "Human Capital" by Becker (1997) and followed by others (Strawinsky et al., 2019; Marek and Doucek, 2016). This considerable difference has been documented in a number of countries around the world, and it is usually even more pronounced in less developed countries where there are few educated labor (Anyzova, 2017; Yang and Gao, 2018). From the perspective of supply and demand, it is clear why education is associated with higher wages. The companies on the demand side are willing to pay more to highly educated labor, because educated employees create a higher marginal product. On the other hand, labor on the supply side is willing to pay for education costs only if such an investment is efficient for them. The difference between the salary of an employee with higher education and that of a less educated employee is basically a compensatory difference covering the cost of education.

    A number of studies show that the gap between the earnings of skilled and less skilled labor has increased over the last two decades. In explaining this trend, economists are inclined towards two hypotheses. Both point to the fact that there has been a relative increase in the demand for skilled labour over time compared to the demand for unskilled labour. This change in demand triggered a corresponding change in wages, reflected in an increase in income inequality (Gross, 2012; Budria and Telhado-Pereira, 2011). According to the first hypothesis, international trade led to a relative change in the demand for skilled and unskilled labour. With increases in international trade, the domestic demand for skilled labour grows and the domestic demand for unskilled labour falls. According to the second hypothesis, the relative change in the demand for skilled labour compared to unskilled labour occurred due to technological changes. A quantitative validation of these hypotheses is difficult. It is, of course, possible that both are correct: increasing international trade and technological changes can work in conjunction to increase the inequality observed in recent decades.

    It is clear from the nature of education that its effects interfere with all areas of the development of social life, i.e. also with the economic sphere. In the economic sphere, it is mainly manifested as one of the main factors in economic growth (Sredl, 2006). The theories of growth have not been able adequately to explain and describe the causes of and reasons for economic growth, and it was thus necessary to include and endogenise the human capital factor in standard models, as defined by, for example, Ramsey (1928) or Solow (1956), who no longer posit the elementary theory of economic growth based on the invisible hand of the market. One of the important theories is in an article written by the prominent economist Becker (1962). In it, he deals with the development of theories of investment in human capital based on empirical findings and the theoretical knowledge of the time. He generally quantifies the returns to education as follows:

    Y = X + r * C (1)

    where C is the value of the total investment costs, letter r represents the average rate of return, and letter X represents the earnings if no capital investment is made. Human capital thus has a certain natural level of value.

    People, their work, productivity, and human capital are the most important drivers of the economy. It is precisely human capital that is lately becoming the greatest wealth of every individual. Investments in human capital are thus becoming the most needed investments for the future. "Human capital is identified as one of the main determinants of economic growth and plays an important role in the technological progress of countries" (Queiros, 2014).

    This paper will focus on human capital and investments in human capital. Human capital can be defined as "the knowledge, skills, competencies and attributes embodied in individuals that facilitate the creation of personal, social and economic well-being" (OECD, 2007). Through education, each individual thus increases their position, competencies and productivity, which ensures a greater reward for their work. For society, the benefit of a well-educated and productive workforce is greater economic growth than would be the case without this advantage. It is, therefore, a positive externality that effects both the individual and the entire economy.

    Education is one of the areas that fall under non-market services and is therefore not determined by standard supply and demand interactions. Market-based forms of education include those that are shaped by the market, and they comprise other types of education, such as driving schools or language schools. However, this paper will deal with dominant, non-market education. This is also a public good, with the characteristics of such. As Musil (2015) states, in such a case, it is necessary to distinguish the different stages of the whole process of genesis and development. These stages are Inputs, Activity, Output and Outcome. This paper is primarily focused on the area of Inputs and Outcome. The activity variable is assumed to be constant, because no major education reform has taken place in the Czech Republic during the monitored period, and we also consider output to be constant.

    Moreover, as Barro (2000) demonstrates in his article, based on a thorough correlation made in a sample of OECD countries, there is no direct and conclusive relationship between the skills, or knowledge, of students tested in science, mathematics, and reading and educational attainment, which is quantified as the average number of school years completed. On the other hand, as the author himself states, "the effect of school quality is quantitatively much more important" (Barro, 2001). The negative impact of rising public spending on economic growth is generally confirmed by many studies, such as those by Chen (2005) and Afonso (2010). Based on modified regression, which works with panel data from OECD countries, Zimak (2016) states that there is a negative relationship between growth in government sector spending and overall economic growth. Nevertheless, he notes that the general reason why increasing government sector spending has such an impact is that the private sector is pushed out. However, this is a minority sector in the case of education and this assumption does not apply here.

    A similar model, again based on OECD countries, is used by Queiros (2014). A more highly educated society supports the growth of the economy. Queiros also logically concludes that growth is supported even more if the economy is focused on areas that require educated human capital. Similar research was conducted by, for example, Shukla (2017). It is also necessary to take into account the specification of the given area related to time lags, as is stated by Kazmi (2017). Based on the Johansen cointegration technique, he distinguishes the impacts of human capital on GDP over short and long periods in which investments in human capital have a significantly positive effect. In this context, the question of measuring their efficiency arises as well. An investment, no matter of what type, is made with the goal of future returns. If we invest in a new production hall, or in securities, we know methods for evaluating these investments. It is relatively easy to estimate the future financial flows of such investments and to assess the level of risk. An evaluation of the efficiency of government expenditure on education, i.e. the school system, is the subject of...

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