Dublin Economics Workshop

Kenmare 16 October 2010

Value for Money in Irish Education

Sources of data for evaluating outcomes
and investment

Tom Healy
(Senior Statistician, Department of Education and Skills)
0 Introduction
Reviewing data to inform policy to maximise the ‘value for money’ spent on
education in Ireland is timely. The matter may be considered from three angles– not
necessarily contradictory:
- How is it possible to do more with less in the context of fiscal adjustment and
lower spending overall?
- How is it possible to improve the quality of educational activity (teaching and
learning in the formal education environment) for a given budget allocation?
- How is it possible to measure and maximise the potential social, economic and
personal benefits to investing in education including targeted investment in
those areas likely to yield the highest societal return.?
The last question is particularly relevant as investment in human capital may turn out
to be critical to the future sustainability of economic recovery and Ireland’s position
in a global competitive market for good and services embodying knowledge and
skills. Competition for scarce human capital itself and the perceived quality of the
education and training system, here, may very well turn out to be key to survival and
recovery as the history of economic development in the 1960-2000 period suggests.
The purpose of this Paper is not to answer the above three questions but, rather, to
highlight a range of sources in the international literature and existing databanks from
which it may be possible to inform debate on future priorities for resource allocation
in education and training. For brevity, the term ‘education’ is used inter-changeably
with ‘schooling’ or ‘formal education and training’. However, in the real world,
‘schooling’ is only one place where learning occurs.
This Paper is organised around the following questions:
1. Is spending on education a form of investment in human capital?
2. What has the international literature to say about the social and private returns
to investment in education?
3. How much is spent on formal education and training in Ireland and how does
this compare through time and internationally?
4. How well does Ireland compare on various measures of outcomes?
5. What are the key information gaps in assessing the challenges of the future?

1 Is spending on education a form of investment in human capital?

It is a chosen theory which determines what we measure. And the questions we ask
are guided by our system of values.
The term, human capital, is frequently used to measure or account for the impact of
schooling on productivity, wages and national output. Impacts are treated at two
levels – individual with reference to labour market earnings, or at the macro-level
such as in growth of Gross Domestic Product while taking account of ‘spillovers’ by
way of productivity-enhancing effects of working in higher-skill organisation and
innovation systems. Analysts have, typically, used a proxy measure for human capital
(e.g. years of schooling or age, qualifications or cognitive test achievement) and have
focussed on a narrow outcome (earnings or macro-level productivity).

2
In the literature on the economics of education the contributions of ‘schooling’ are
distinguished and measured empirically as distinct from ‘innate ability,’ which is
assumed to be fixed and given. Hence, the investment role of organised education
and training is seen as adding value to a fixed and innate endowment of ability. The
contribution of home and other ‘extra-school’ effects are isolated by means of proxy
measures for age, socio-economic background etc. In more refined analyses,
instrumental variables as well as panel data for genetically identical twins are
employed to isolate the pure schooling effect. In the next section of this paper some
of the findings of research on the returns to investing in human capital are outlined.
Amartya Sen (1999: 293) sums up the popular take on human capital as follows:
At the risk of some oversimplification, it can be said that the literature on
human capital tends to concentrate on the agency of human beings in
augmenting production possibilities.
Sen contrasts this view with:
The perspective of human capability focuses, on the other hand, on the ability
– the substantive freedom – of people to lead the lives they have reason to
value and to enhance the real choices they have. The two perspectives cannot
but be related, since both are concerned with the role of human beings, and in
particular with the actual abilities that they achieve and acquire. .
What individuals and groups can do is just as important as what they can purchase or
produce. Looked at in this way, human capital is more than the acquisition of
traditionally acknowledged and measured cognitive skills and knowledge in
individuals. It refers to the widest possible range of potential attributes including the
capacity to work and live with others, make ethical judgements and act accordingly as
well as make use of various types of ‘tools’ – language, symbols, machinery,
computers etc.
One possible way of defining ‘human capital’ is:
The knowledge, skills, competencies and attributes embodied in individuals
that facilitate the creation of personal, social and economic well-being.
(OECD, 2001: 18)
This definition acknowledges the potential of human capital to contribute, not only to
what it termed economic well-being, but all aspects of human well-being for which
individuals and societies undertake investment in learning (of which formal education
is one contributor along with families, communities, workplaces and various civic
associations).
The case for public intervention in education was recognised by Adam Smith who
regarded education as an area where the State had an important role to play in
supporting provision. He also supported public provision for defence and justice. In
the case of education he wrote:
The third and last duty of the sovereign or commonwealth is that of erecting
and maintaining those public institutions and those public works, which,
though they may be in the highest degree advantageous to a great society, are,
however, of such a nature that the profit could never repay the expense to any
individual or small number of individuals, and which it therefore cannot be
expected that any individual or small number of individuals should erect or

3
 maintain. The performance of this duty requires, too, very different degrees of
expense in the different periods of society
[Book Five, Chapter I, part 3 of The Wealth of Nations]
In contemporary language, the recently published Infrastructure and Investment
Priorities 2010-2016 (Department of Finance, 2010) provides a justification for
Government involvement under the following headings:
• Positive externalities: the social returns to education outweigh the private
returns in the form of productivity spillovers, reduced unemployment and
social welfare payments, increased civic participation and reduced crime. The
government therefore has an interest in investing in education;
• Information asymmetries: individuals can be unaware of the extent of the
benefits that can accrue from education. Education is a merit good and so
policy dictates that participation is compulsory up to the age of 16;
• Access to finance: because of the timing of education decisions – education
tends to occur early in a person’s life - individuals would generally lack the
means to pay for education on an open market. Also, because of the element of
risk involved (as participation in education will not always result in higher
earnings) some individuals may not opt to invest in education; and
• Equity: equal access and compulsory participation in education are features
of government policy in this area on account of equity objectives.

2 What has the international literature to say about the social and private
returns to investment in education?
The last section has suggested that effort/time/expenditure on human capital including
schooling, on-the-job and off-the-job training and other types of learning from short-
term courses to informal learning/doing/observation/mentoring are an investment in
productive capacity. But, how is it possible to measure or account for the ‘return’ on
such investment? The literature distinguishes between:
- Private (or individual) and public (or social) returns to investment in education
and training
- Monetary and non-monetary returns
- ‘Economic’ and ‘social’ returns.
Private and public rates of return can be estimated using data on private costs and
post-tax earnings over a lifetime. International comparative data from OECD (OECD,
2010: EAG, Education at a Glance – OECD indicators) indicates a large premium for
individuals as a result of additional years of schooling. For example, EAG (indicator
A7.1; P 127) shows an estimated average premium, in 2008, of 53% to higher
education university graduates compared to those whose completion is at upper
secondary level only, across OECD countries. The estimate for Ireland (based on
2005 EU-SILC data) was very similar at 55%.
With upper secondary and further education as the baseline level of education for
most workers in recent decades, investment in higher education gives a clear earnings
gain to those who complete this level of education. Leaving aside the cost and
forgone earnings during higher education studies, the additional earnings (before

4
deduction of income and consumption taxes) associated with higher education vary
considerably by country. The approach taken by OECD in EAG is to estimate the Net
Present Value (NPV) – defined as the amount which would have to be invested to
achieve a comparable flow of future returns based on the estimated additional
earnings to individuals over a lifetime of employment. Costs and benefits in different
periods are discounted back to the beginning of the investment period by means of an
estimated internal rate of interest.
This estimation may be divided into two components:
- financial returns to the individual = individual’s earnings and costs; and
- financial returns to Government = higher income taxes and social
contributions, lower social transfers to individuals, as well as the costs borne
by the government for educating the individual.
The OECD regularly publishes data on ‘public’, but not social, returns in the wider
sense of monetising the impact on health, crime, social cohesion etc. OECD estimates
of public returns refer to additional tax and social contribution receipts arising from
higher incomes as well as an estimate of the monetary value of lower social transfers
due to higher earnings and employment among better educated persons. However,
these estimates refer to only part of the wider social benefits of additional schooling in
so far as they omit potential long-term gains arising from better health, civic
participation and lower crime.
Clearly, the estimated financial returns to individuals or Government is based on a very
partial and historic relationship between different variables. Short-term changes in
labour market conditions as well as long-term shifts in patterns of behaviour may
change the actual outcome very significantly compared to the estimates shown here
which are based on average and stable relationships between variables.

Chart 1 ‘Public’ Net Present Value (public costs and benefits) for an individual
obtaining tertiary education as part of initial education (2006)

Germany 179,199
Belgium 167,759
Hungary 161,347
Austria 117,246
Finland 107,507
Netherlands 103,461
Portugal 96,585
Poland 95,867
United 95,318
Italy 86,599
OECD 86,404
Australia 84,538
Czech Rep. 83,236
Denmark 81,017
Ireland 74,219
Canada 62,141
Norway 43,419
Sweden 44,990
New 31,144
Spain 26,808
Korea 23,994
Turkey 21,753

0 50,000 100,000 150,000 200,000

5
Source: Education at a Glance, 2010 (page 150). Data for Ireland refer to 2004 and come
from EAG published in 2009 (page 168).
All indicators shown in EAG are indicators of association and take no account of
confounding variables such as home and community environment, quality of learning
and learning outside the formal context. Moreover, there is a long dispute about
whether schooling is a signal or filter for higher ability and commitment or a direct
measure of skill-enhancing and productivity-enhancing investment. A more
sophisticated measure of private rates of return rests on wage regression models in
which earnings are related to years of schooling, age (as a proxy for work experience),
occupation and other explanatory variables. Micro-economic evidence indicates that
an additional year of education is associated with, on average, between 5 and 15%
higher earnings (Krueger and Lindahl, 1999).
Macro-economic and other social monetary benefits of learning
The literature on GDP impacts is extensive. Studies of the impact of education on
economic growth have often been inconclusive. This may partly be linked to poor
data quality and partly to the difficulty of identifying the complex interactions through
which human capital plays a role in the growth process. Some common data pitfalls
arise. These include questions about:
- the direction of causation
- the omission of significant explanatory factors embedded in the cultural and
institutional environment
- statistical proxy measures such as years of schooling, highest level of
education attained etc may be poor proxy measures for skill and ability
One drawback of most cross-country work is the likelihood of important differences
in the nature and quality of schooling across countries, which could undermine the
usefulness of international comparisons (Temple, 2001). Hanushek and Kimko (2000)
and Barro (2001), using data on international tests of cognitive ability in mathematics
and science, estimate the educational or skill quality of different groups in the adult
labour force. They found that using measures based on the quality of education
provides a more powerful explanation of economic growth in different countries than
simply years of schooling. Hanushek and Woessmann (2009) found significant
economic growth effects of cognitive skills (measured by scores in Mathematics and
Science over a long period for which comparative data were available) while using
instrumental variables for institutional features of school systems (e.g. existence of a
standard exit examination and degree of school autonomy).
More recently, OECD (2010) has drawn on cross-country modelling to relate
cognitive skills – as measured by PISA and other international measures – to growth
in GDP. It is claimed that relatively small improvements in the cognitive scores of a
country’s labour force can have very large impacts. Moreover, it is suggested that
these gains can far outstrip today’s value of the short-run business-cycle demand
management. In addition to cognitive achievement, an individual’s non-cognitive
traits, such as self-efficacy and social skills, have also been shown to be associated
with an increase in civic participation and an improvement in health behaviours.
Based on data for Ireland, it is likely that public expenditure on capital has a stronger
positive impact, other things equal, than expenditure on salaries and other current

6
expenditure. Support for this comes from the empirical work of Bénétrix and Lane
(2009) who have drawn on data from a long period spanning 1970 to 2006. Analysis
of the multiplier effect of investment in public infrastructure has formed indicates
some positive returns (see for example Morgenroth and Fitzgerald, 2006)
Input-Output Tables produced by the Central Statistics Office indicate how the
education sector interacts with the other sectors of the economy. Leontief inverse
coefficients are estimated by the CSO and the most recently available data refer to
2005. These indicate the impact of changes in demand on the various sectors of the
economy. It purports to show the use made of domestically produced products in the
manufacture or provision of other products. It attempts to measure the complete direct
and indirect impacts on the economy resulting from the increase in demand for
domestic output of a given product. An exogenous increase in demand for educational
services of €1 would, other things equal, require a supply of additional output of
€1.034 in the education sector plus €0.046 in ‘other business services’, €0.025 in
electricity and gas, €0.023 in ‘recreation’ and €0.017 in construction, etc. The total
‘output multiplier’ is shown by the CSO as 1.302. The combined ‘direct and indirect
multipliers’ for other inputs in the case of education are shown in the table below.

Table 1 Direct and indirect multipliers for various inputs (Education)

Imports of goods and services 0.087
Product taxes less subsidies 0.018
Compensation of employees 0.822
net operating surplus 0.049
Consumption of fixed capital 0.019
Other taxes less subsidies on production 0.004
Source: Table 5. Supply and Use and Input-Output Tables for Ireland, 2005 (CSO:2009)

The import content of different industries (as categories in NACE) varies hugely from
low values of under 0.15 (wholesale, education and real estate) to over 0.50 in
industries such as office machinery, chemicals and insurance. All of these impacts are
at the margin indicating the impact of marginal increases in demand for educational
services. It is difficult to measure, precisely, the fiscal multiplier effect of (public)
expenditure on education. However, the input-output data from 2005 suggests that:
- there is some impact both in terms of domestic demand and intermediate
consumption of produce of other sectors of the economy; and
- the import leakage is not nearly as high as in other areas of economic activity.
However, it would be very misleading to read the derived ‘direct and indirect
multipliers’ in the case of education as indicative of the overall impact on the
domestic economy. After an initial period in which compensation of employees is
raised by 0.822 for a unit increase in education spending, there will be import leakage
via household spending. In 2005, €70.6bn was spent by households of which €10bn
was spent on imported produce (Table 4 of the Input-Output tables). To estimate the
total impact over time on domestic demand (regardless of any possible long-term
increase in labour force quality or externalities arising from higher productivity and
innovation) it would be necessary to generate augmented input-output tables
estimating impacts over a period of time. Alternatively, it may be possible to explore

7
these questions via an integrated model of economic forecasting and sensitivity
analysis.
Attempting to capture the monetary benefits of additional schooling is one thing. It is
even more difficult to measure the claimed non-monetary benefits such as the
pleasure of learning and the greater job satisfaction which may flow from a
qualification as well as other possible benefits such as better health. Social rates of
return should combine the full range of public benefits and costs including spillover
effects to the extent that these are measurable. The OECD have published the results
of a research review in this area (OECD, 2007). It focussed, in particular, on two
dimensions: health and civic and social engagement where the evidence points to
significant positive impacts while controlling for other variables. The social benefits
of investment in education may impact on economic performance in so far as socially
cohesive and healthy societies can foster innovation, creativity as well as higher levels
of trust and cooperation. Various lines of research have used statistical controls for
income, race, social status and other variables to show that education is associated
with better health, lower crime, political and community participation and social
cohesion. Some studies have gone further in using longitudinal data on identical twins
to test the impact of genetic factors. Use of instrumental variables is a popular method
for addressing problems of endogeneity in explanatory models.
Care needs to be taken in interpreting all of these results, since the direction of
causation is unclear, and other uncontrolled factors may be at work. However, the
conclusion of Wolfe and Haveman (2001) is that the social benefits of education are
large – possibly larger than the direct labour market and macro-economic effects.
The positive role of education in terms of civic engagement and awareness is also
confirmed by empirical research. Controlling for a wide range of variables, the level
of education is highly correlated with various measures of civic engagement (NESF,
2003, CSO, 2009 and Healy, 2005). It is difficult to put a market price on these types
of outcomes.
Many empirical studies call into the question the supposed positive association
between expenditure on schools and academic or test achievement outcomes.
However, Holmund, McNally and Viarengo (2008) provide evidence from analysis of
UK data on primary school pupils that model specification is important to
understanding outcomes. They found that ‘school expenditure has a consistently
positive effect for students who are economically disadvantaged’ (Holmund et al,
2008:15). They conclude that ‘a general rise in school expenditure can raise
educational standards’.
It could be suggested, at this point of relative ignorance, that:
- Education is not a silver bullet;
- but it does have some positive impacts both on domestic demand and
aggregate supply of skills in the labour force as well as attraction of foreign
direct investment;
- there is compelling evidence that the social returns are quantitatively
significant; and
- any estimated impacts ‘at the margin’ have to be viewed in a wider context of
public finances, the dynamics of economic recession and recovery which may
defy relatively stable statistical relationships observed from historical data.

8
3 How much is spent on formal education and training in Ireland and how
does this compare through time and internationally?
Quantifying the amount spent on formal education and training is not as easy as first
appears. The Department of Education, Central Statistics Office and OECD have been
publishing data on educational expenditure for many years. In the case of data
published by the OECD in Education at a Glance 1 (EAG - the ‘bible’ of comparative
international data), there is a more or less consistent time series going back to 1989
since the first publication of EAG in 1992. EUROSTAT also provides a very useful
online source of information focussed on EU Member States and providing similar
but not identical perspectives.
The statistical trends in spending indicate large increases – measured in volume or
real terms – over a 20 year period. Spending has tended to track growth in GDP in
most OECD countries. Ireland has been no exception. There is evidence of stickiness
in the amount spent in so far as public spending on education as a percentage of GDP
(or alternatively GNI) slipped in years where growth in GDP was fastest and has
increased in the most recent two years where GDP and GNP have fallen significantly
and public spending on education has stabilised or increased. Table 2, below, shows
trends in public spending on education as a percentage of GDP and GNI. The series is
not directly comparable to data published by OECD due to different coverage and
definitions. However, data covering a ten year period in Table 1 provide estimates of
spending and national income up to 2010 whereas the latest published OECD data (as
of 7 September 2010) only extend to the year 2007.

1
Data users may download – for free – detailed comparative data for all OECD
countries plus many partner countries including Russia, China and Brazil at the
following web address:
http://www.oecd.org/document/52/0,3343,en_2649_39263238_45897844_1_1_1_374
55,00.html
(page down to list of tables available in Excel format)

9
Table 2 Exchequer expenditure on education as % of all economic activity
– various years

Year Total Gross Voted As percentage of As percentage of

Expenditure – GDP GNI
Department of
Education and
Skills
2001 4,791,378 4.1 4.8
2002 5,390,451 4.1 5.0
2003 5,864,783 4.2 4.9
2004 6,597,296 4.4 5.2
2005 7,217,797 4.5 5.2
2006 7,896,897 4.5 5.1
2007 8,704,590 4.6 5.3
2008 9,241,354 5.1 5.9
2009 9,462,000 5.9 7.1
2010 8,888,000 5.7 6.8
Sources: DES, CSO, ESRI (GDP & GNI forecasted for 2010)
Note: expenditure for FAS is excluded.

It is useful to contextualise trends in public expenditure on education with reference

to recent trends across the 27 Member States of the European Union. Chart 2
illustrates trends in total public spending as a % of Gross Domestic Product.

Chart2 Total Public Expenditure and Revenue as a percentage of Gross

Domestic Product (EU27 and Ireland)

60

50

40
% GDP

30

20

10

0
'98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10

EU27 Exp IE Exp EU27 Rev IE Rev

10
Source: Total General Government Expenditure and Total General Government Revenue
(ESA95). Eurostat website database (September 2010):
http://epp.eurostat.ec.europa.eu/tgm/table.do?tab=table&init=1&plugin=1&language=en&pco
de=tec00021
Data for Ireland for 2010 come from the Stability Programme Update, December 2009,
(Department of Finance). Note that the estimate for 2010 does not include the cost of bank
recapitalisation, whereas, the figure for 2009 does.
See: http://www.budget.gov.ie/Budgets/2010/Documents/Final%20SPU.pdf

The trends shown in Chart indicate that total public spending and revenue, in Ireland,
are at a lower level than is the case across the EU27. However, accounts needs to be
taken of the impact of using Gross Domestic Product in such comparisons instead of
Gross National Income. GDP is the standard measure used by Eurostat and the
European Commission in comparing Member States with regard to expenditure,
revenue, deficits and public debt. Public spending and revenue relative to total
economic activity would be considerably higher if GNI were used in the denominator.
On the other hand, any comparisons based on GNI would have to exclude receipts
such as corporate taxes paid by companies repatriating profits to other establishments
outside this jurisdiction. Whichever measure of total economic activity is used, the
trends shown in Chart suggest the following:
- Public spending and revenue, here, were less than the EU27 average
confirming a low-tax position compared to other Member States.
- With the onset of recession, public spending increased as a percentage of GDP
across most EU Member States including Ireland. This was triggered by
automatic fiscal stabilisers as well as, in the case of Ireland, a sharp
contraction in GDP. The impact of bank recapitalisation is also seen in the
figures for Ireland in 2009 where approximately 2.5 percentage points are
added to the estimate of public spend as a % of GDP (pushing up the figure
from 45.9% to 48.4% in 2009)
- Total revenues, reflecting prevailing economic conditions, have remained
fairly constant as a percentage of GDP during the recent economic downturn
(suggesting some overall absolute decline in revenue in Member States where
GDP contracted).

11
Chart 3 Public Expenditure in Ireland as % of GDP classified by broad
COFOG (classification of functions of Government)

45

40

35

30
% GDP

25

20

15

10

0
'02 '03 '04 '05 '06 '07 '08

EDUC HEALTH SOC PROT OTHER

Source: Eurostat website (September 2010)

Within the total of public expenditure for education in Ireland, a very large proportion
is spent on salaries as already noted in the discussion of input-output tables, above.
Capital spend makes up about 8% of total voted public expenditure on education by
DES as shown in Chart 4, below.
Chart 4 Estimated share of various types of expenditure – Department of
Education and Skills

Education Cake 2010

PAY
GRANTS
CAPITAL
STUDENT Support
SCH TRANSPORT
DES & AGENCIES

Source: DES. Note: expenditure for FAS is excluded.

12
Chart 5 Total Public Expenditure per student 1999-2009

Total Public Spend per Pupil/Student (non-capital - 2009

constant prices)

12,000

10,000

8,000 Primary
6,000 Second Level
€

4,000 Third Level

2,000

0
99

00

01

02

03

04

05

06

07

08

09
19

20

20

20

20

20

20

20

20

20

20
Source: DES Statistics page here.
http://www.education.ie/servlet/blobservlet/web_stats_08_09.pdf
Trends in ‘unit cost’ – non-capital spending per student at first, second and third level
are shown in Chart 5. Adjusted for price inflation, the data indicates significant
growth in the real value of spending at first and second level. However, in the case of
higher education the value of real spending has been fairly constant.
4 What are the key information gaps in assessing the challenges of the
future?
Recent decades have witnessed a growing policy consensus on the importance of
lifelong and lifewide learning (the latter implying a range of learning environments).
Among economists and policy analysts the term ‘human capital’ is now accepted as a
useful concept and empirical measure. However, there is, also, an emerging
awareness of the problems of focusing unduly on narrow interpretations and measures
of human capital. Outcome-based measures, such as surveys of literacy and numeracy
skills, are clearly a very important way of directly measuring human capital and
represent better ways of measuring the quality of educational outcomes compared to
years of schooling or qualifications obtained. However, they still only capture some
aspects of learning outcome.
Given the complementary strengths and weaknesses of traditional input based
measures of human capital and direct survey-based measures, any comprehensive
measurement strategy will need to use both approaches. OECD (2007) has made the
case for:
- A review of the public objectives of education including the criteria and
measures that are used to monitor progress;
- A strengthening of the statistical and knowledge base using various types of
surveys and experimental design for assessing outcomes;

13
 - A widening of the range of literacy benchmarks including the range of
educational achievement measures to take into account aspects such as health
and civic literacy.
Any future increases in aggregate human capital need to be empirically linked to:
- the quality of investment in human capital and the relevance of skills to social
and economic demands;
- the distribution of learning opportunities within countries given the association
between inequality and overall performance; and
- the potential for market under-investment because of public good or
externality effects.
The comments by OECD Secretary-General, Angel Gurría, at the recent launch of the
2010 edition of Education at a Glance are relevant:
We are moving towards a new phase in education. A phase that will measure
the success of education systems no longer by how much countries spend on
education or by how many individuals complete a degree, but by the
educational outcomes achieved and by their impact on economic and social
progress. To recover faster from the economic crisis and achieve long term
sustainable growth, our countries need their supply-driven education systems
to respond to rapidly changing demands for skills.

14
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OECD (2010) The High Cost of Low Educational Achievement: The Long-run
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