Indicator A5. What are the financial incentives to invest in education?

Private net financial returns are the difference between the costs and benefits associated with attaining an additional level of education. In this analysis, the costs include the direct costs of attaining education and foregone earnings, while the benefits correspond to earnings from employment after paying income taxes and social contributions (see Definitions section). Another way to analyse returns to education is through the internal rate of return, which is the real interest rate that would equalise the costs and benefits, leading an investment to break even. It can be interpreted as the interest rate on the investment made on a higher level of education that an individual can expect to receive every year during their working-age life. The financial incentives to invest in education can also be expressed as total benefits relative to total costs (benefit-cost ratio). This is expressed as the financial benefit of attaining an additional level of education for each USD invested in it. Depending on which measure is used, the relative incentives to invest in additional educational attainment differ between men and women.

In all OECD countries, investing in upper secondary education pays off in the long run for both men and women. The gains associated with this level of education that individuals can expect to receive over their career exceed the costs they bear during their studies. On average across OECD countries, the private net financial return for each individual attaining upper secondary education, compared to an individual with below upper secondary education, is USD 186 100 for a man and USD 150 400 for a woman (Figure A5.1).

The private financial returns from upper secondary education are higher for men than for women in most OECD countries with available data. In Korea, the private financial return from upper secondary education is more than three times higher for men than for women. The only countries where women have higher private financial returns than men are Belgium, Finland, France, Israel and Slovenia (Figure A5.1).

Direct costs refer to the total expenditure on education, which are the same for men and women. On average across OECD countries, the direct costs for both men and women of attaining upper secondary education are USD 2 700. While direct costs are the most obvious element, in most countries the main costs are foregone earnings, i.e. the earnings individuals could expect to receive if they decide not to pursue further education. Foregone earnings depend on the length of education, earnings levels, employment rates and the difference in earnings and employment between levels of educational attainment. The current model also takes into account the fact that, in many countries, it is common for students to work while studying, thus reducing their foregone earnings and the total cost of education (OECD, 2017[1]). On average across OECD countries, the foregone earnings of attaining upper secondary education are about USD 20 500 for a man and USD 11 500 for a woman (Table A5.1 and Table A5.2). When direct costs and foregone earnings are combined, the average total costs of attaining upper secondary education, compared to not continuing in education, are USD 14 200 for women, representing about 60% of the total costs for men (USD 23 200). In Sweden, men can expect their total costs to be nearly four times those of women. Luxembourg is the only country where women face higher total costs than men (Figure A5.2).

Differences in labour-market outcomes lead to a wide variation in the private total benefits associated with investment in upper secondary education for men and women. On average across OECD countries, the total benefits of attaining upper secondary education are USD 209 300 for men and USD 164 600 for women. This is mainly due to gender gaps in earnings, but is also related to lower employment levels for women with an upper secondary education than for men (see Indicators A3 and A4 and Figure A5.2).

While further education yields higher earnings over the course of a working life, the private benefits from investing in education also depend on countries’ tax and social contribution systems (Brys and Torres, 2013[2]). For instance, in Chile, Estonia, Korea and Switzerland, income taxes and social contributions amount to less than one-fifth of the gross earnings benefits for a man attaining upper secondary education, while in Belgium they add up to more than 40% of the gross earnings benefits. As women tend to have lower earnings, they often fall into lower income tax brackets. For example, in Ireland and Korea, the income tax and social contributions for a woman who attained upper secondary education are less than one-third those of a man with the same level of attainment (Table A5.1 and Table A5.2). Note that taxes and social contributions also relate to pensions and retirement programmes, which are not considered in this indicator.

Across OECD countries, the average internal rate of return to upper secondary education is 25% for men and 32% for women. However, there are wide variations across countries, particularly for women. The internal rate of return to upper secondary education for women ranges from 7% in Luxembourg to more than 70% in Denmark and Ireland (Table A5.1 and Table A5.2).

Looking at the benefit-cost ratio, on average across OECD countries, for each USD invested in upper secondary education, men can expect to receive USD 9 over the course of their working-age life, while women can expect to receive USD 11.6 The private benefits for each USD invested in upper secondary education is the lowest in Luxembourg (USD 3.3 for a man and USD 2.2 for a woman) and the highest in Denmark (USD 31.2 for a man and USD 63.9 for a woman). In Luxembourg, women face the highest total costs of pursuing upper secondary education among OECD countries, and the fifth lowest total benefits. In contrast, women in Denmark pay the lowest costs for upper secondary education and can expect to receive the second highest total benefits from it (Figure A5.3).

In most OECD countries with available data, women enjoy higher financial benefits than men for each USD invested in upper secondary education, even though their private net financial returns from upper secondary education are lower. This is due to the fact that, compared to the difference in total benefits, total costs are disproportionally lower for women than for men. For instance in Sweden, although women’s total benefits from upper secondary education are about 85% of the total benefits for men, their total costs are just one-quarter of the total for men. However, in Australia, Korea, Luxembourg, Norway and the United Kingdom, men receive greater financial benefits for each USD they invest in upper secondary education than women do (Figure A5.2 and Figure A5.3).

Governments are major investors in education, especially at non-tertiary levels of education (see Indicator C3). From a budgetary point of view, it is important to analyse whether these investments will be recovered, particularly in an era of substantial fiscal constraints. Higher levels of educational attainment tend to translate into higher earnings (see Indicator A4), which in turn generate higher income taxes and social contributions for governments. On average across OECD countries, the public net financial returns from upper secondary education are about USD 44 600 for a man and USD 13 700 for a woman. The internal rate of return from upper secondary education to governments is 6% for a man and 3% for a woman (Table A5.4, and Table A5.5 available on line).

Public net financial returns are based on the difference between the costs and the benefits associated with an individual attaining an additional level of education. In this analysis, the costs include the direct public costs of supporting education and foregone taxes on earnings, while the benefits are calculated using income tax and social contributions (see Definitions section).

On average across OECD countries, the total public costs for an individual to attain upper secondary education are USD 38 400 for a man and USD 35 900 for a woman. For governments, direct costs (including student grants) represent the largest share of total public costs for upper secondary education, even though student loans are not taken into account in this indicator. On average across the OECD, direct costs account for roughly 90% of total government costs of upper secondary education for men and women. Since the direct costs are the same for men as for women, the total public costs are quite similar for men and women. The countries with high direct costs are also the countries with the largest total public costs. Luxembourg has the highest direct costs (USD 80 200) and total public costs for men (USD 86 700) and for women (USD 85 900). In contrast, Turkey has the lowest direct costs (USD 11 900) and total public cost for men (USD 13 700) and women (USD 12 400) of all OECD countries with available data (Table A5.3 and Table A5.4).

Governments offset the costs associated with education through the additional tax revenues and social contributions from higher-paid workers, who often have greater educational attainment. On average, the total public benefits amount to USD 83 000 for a man with upper secondary education as his highest attainment. The total can be broken down into income tax effects (USD 54 600) and social contribution effects (USD 28 400). For a women with upper secondary attainment, the total public benefits are USD 49 600 on average, composed of income tax effects of USD 29 100 and social contribution effects of USD 20 500. Across OECD countries, Austria and Denmark gain the largest total public benefits of upper secondary education for men (over USD 150 000) and Denmark and Germany gain the largest benefits for women (over USD 100 000) (Table A5.3 and Table A5.4).

In relative terms, the public benefits for each USD invested in upper secondary education are generally much lower than private ones, as the total costs are greater for governments than for individuals. On average across OECD countries, each USD that governments invest in upper secondary education generates a public benefit of USD 2.2 for a man, and USD 1.4 for a woman. In Chile, Korea and Luxembourg, the public benefits from investment in upper secondary education do not cover the total public costs for both men and women. In Estonia, Ireland and New Zealand, the public benefit-cost ratio is below one for women, but not for men (Figure A5.3). The gender difference is mainly due to the fact that, while the public costs are similar for men and women, the public benefits for men are greater than for women (Table A5.3 and Table A5.4). This suggests that governments have a role to play in improving the integration and participation of women in the labour market.

As with upper secondary education, adults completing tertiary education benefit from positive financial returns over their working-age life. On average across OECD countries, the financial returns from tertiary education are about 1.5 times higher than the returns from upper secondary education for both men and women. In Chile and Luxembourg, the financial returns from tertiary education are at least five times higher than those from upper secondary education for both men and women. However, the returns from upper secondary education is higher than from tertiary education in Australia (for men), the Czech Republic (for women), Denmark (for men and women), Finland (for women), Germany (for women), Norway (for men), Sweden (for men and women), Switzerland (for women) and the United Kingdom (for men) (Figure A5.1).

Although young women are more likely to complete tertiary education than young men (see Indicator A1), women generally receive lower returns than men from tertiary education. Across OECD countries, the average private financial return from tertiary education is USD 295 400 for a man and USD 225 400 for a woman. In the Czech Republic and Hungary, the financial returns for women are only about half of the returns for men. The only countries where women have higher private financial returns than men are Latvia, Norway, Spain, Sweden and Turkey. Moreover, the gender difference in net financial returns to education tends to increase with the level of educational attainment (Figure A5.1).

Across OECD countries, the average internal rate of return to tertiary education is 16% for men and 19% for women. The lower internal rate of return from tertiary education compared to upper secondary education is due to the higher total costs of attaining tertiary education (Table A5.1, Table A5.2, and Tables A5.5 and A5.6, available on line).

On average across OECD countries, the direct costs of tertiary education amount to USD 9 100 for both men and women, which is more than three times the direct costs of upper secondary education. The direct costs are particularly high in the United Kingdom and the United States: tuition fees and living expenses during tertiary education amount to more than USD 30 000 and exceed foregone earnings, although even in these countries the earnings advantage associated with tertiary education compensates for the costs. In most OECD countries, however, the main costs of tertiary education are still foregone earnings. The average foregone earnings for attaining tertiary education are about USD 38 900 for a man and USD 28 500 for a woman (Table A5.11, Table A5.2, and Tables A5.5 and A5.6, available on line). When direct costs and foregone earnings are combined, Turkey has the lowest total costs for both men and women (USD 12 400 for men and USD 5 800 for women), while Switzerland has the highest total costs for women (USD 87 100) and the United Kingdom the highest for men (USD 79 300) across all OECD countries with available data (Figure A5.4).

Further education yields higher gross earnings benefits over an individual’s career. Across OECD countries, the average gross earnings benefits are USD 543 300 for a tertiary-educated man and USD 388 200 for a tertiary-educated woman compared with their peers with upper secondary attainment. Countries’ tax and social benefit systems also have an impact on the benefits of attaining tertiary education. Income taxes and social contributions account for the lowest share of the benefits in Chile and Korea (less than one-fifth of the gross earnings benefits), while in Belgium and Italy (for men only) they account for more than half (Tables A5.5 and A5.6, available on line). On average across OECD countries, the total benefits net of income taxes and social contributions are about USD 343 400 for a tertiary-educated man and USD 263 000 for a tertiary-educated woman. Norway, Sweden and Turkey are the only OECD countries where women enjoy higher total benefits from tertiary education than men (Figure A5.4).

In two-thirds of OECD countries, the gender difference in the private financial benefits for each USD invested in tertiary education is less than USD 2. On average across OECD countries, the private financial benefits for each USD invested in tertiary education are very close for men and women (around USD 7), although women receive lower private net financial returns than men from tertiary education. This is due to the fact that, on average, women’s total costs and total benefits represent a similar proportion of men’s total costs and total benefits, around 77%. (Figure A5.1, Figure A5.4 and Figure A5.5).

Higher levels of educational attainment also lead to higher returns for the public sector. On average across OECD countries, the net public return for an individual attaining tertiary education is about USD 137 700 for a man and USD 67 900 for a woman. The internal rate of return from tertiary education to governments is 8% for a man and 6% for a woman (Tables A5.7 and A5.8, available on line).

Across OECD countries, the average total costs of tertiary education for governments amount to USD 62 200 for a man and USD 57 300 for a woman. As with upper secondary education, direct costs (including student grants) represent the largest share of the total public cost of tertiary education, even though student loans are not taken into account in this indicator. This is particularly true in countries such as Denmark, Finland and Norway, where students pay no tuition fees and have access to generous public subsidies for higher education (see Indicator C5). Countries with high direct public costs (more than USD 80 000 and up to USD 175 600 for both men and women), such as Denmark, Luxembourg, Norway, Sweden and Switzerland, also tend to have large total public costs. In contrast, Chile has the lowest total public costs (around USD 16 000) across all OECD countries with available data (Tables A5.7 and A5.8, available on line).

On average, the total public benefits are USD 199 900 for a tertiary-educated man, broken down into income tax effects (USD 144 300) and social contribution effects (USD 55 600). For a tertiary-educated women, the total public benefits are USD 125 200, composed of income tax effects (USD 83 900) and social contribution effects (USD 41 300). Among OECD countries, Ireland and Luxembourg have the largest total public benefits for tertiary-educated men (over USD 400 000) and Belgium and Luxembourg have the largest public benefits for tertiary-educated women (over USD 240 000) (Tables A5.7 and A5.8, available on line).

In relative terms, the public benefit from each USD invested in tertiary education are generally much lower than the private benefit, as the total costs are higher for governments than for individuals. On average across OECD countries, each USD that governments invest in tertiary education generates a public benefit of USD 3.2 for a man, and USD 2.2 for a woman. In Estonia, Sweden (only for women) and Switzerland (only for women), the total public benefits do not cover the total public costs of tertiary education. In all countries except Belgium and Latvia, governments receive more benefit from each USD invested in tertiary education for a man than for a woman (Figure A5.5). The difference by gender is mainly due to the fact that the public benefits for men are greater than the public benefits for women (Tables A5.7 and A5.8, available on line). As with upper secondary education, this suggests that governments have a role to play in improving women’s integration into the labour market.

The returns for tertiary education are divided into two categories for analysis: short-cycle tertiary attainment and attainment of a bachelor's, master's and doctoral or equivalent degree. The share of the population with qualifications at each tertiary level differs across countries (see Indicator A1), and the mix of qualifications can impact the financial returns to education for tertiary education overall.

For all countries with available data, the private and public net financial returns from obtaining a bachelor's, master's or doctoral degree are greater than from obtaining a short-cycle tertiary degree. Although the total costs of a bachelor's, master's or doctoral degree tend to be higher, the total benefits accrued during individuals’ working lives compensate for the higher initial costs (Tables A5.9 and A5.10, available online). Private financial returns for tertiary education overall would therefore underestimate the value of investing in bachelor’s, master’s and doctoral degrees, especially in countries with a relatively large share of adults whose highest level of attainment is short-cycle tertiary (see Indicator A1).

Adults refer to 15-64 year-olds.

The benefit-cost ratio is total benefits relative to total costs, representing the financial benefits of attaining an additional level of education for each USD invested in it.

Direct costs are the direct expenditure on education per student during the time spent in school. Direct costs of education do not include student loans.

  • Private direct costs are the total expenditure by households on education. They include net payments to educational institutions as well as payments for educational goods and services outside of educational institutions (school supplies, tutoring, etc.).

  • Public direct costs are the spending by government on a student’s education. They include direct public expenditure on educational institutions, government scholarships and other grants to students and households, and transfers and payments to other private entities for educational purposes. They do not include student loans.

Foregone earnings are the net earnings an individual not in education (a non-student) can expect, minus the net earnings an individual can expect to receive while studying.

Foregone taxes are the additional tax revenues the government would have received if the individual had chosen to enter the labour force as a non-student instead of pursuing further studies.

Gross earnings benefits are the discounted sum of earnings premiums over the course of a working-age life associated with a higher level of education.

The income tax effect is the discounted sum of additional levels of income tax paid by the private individual or earned by the government over the course of a working-age life associated with a higher level of education.

The internal rate of return is the (hypothetical) real interest rate equalising the costs and benefits related to the educational investment. It can be interpreted as the interest rate an individual can expect to receive every year during a working-age life on the investment made on a higher level of education.

Levels of education: See the Reader’s Guide at the beginning of this publication for a presentation of all ISCED 2011 levels.

Net financial returns are the net present value of the financial investment in education, the difference between the discounted financial benefits and the discounted financial cost of education, representing the additional value that education produces over and above the 2% real interest that is charged on these cash flows.

This indicator estimates the financial returns on investment in education from the age of 15 to a theoretical retirement age of 64. The effective retirement age could be slightly above the theoretical retirement age of 64 in some OECD countries (OECD, 2019[4]). Returns to education are studied from the perspective of financial investment.

Two periods are considered (Diagram 1):

time spent in education during which the private individual and the government pay the cost of education

time spent after leaving formal education (or "not studying") during which the individual and the government receive the added payments associated with further education.

In calculating the returns to education, the approach taken here is the net present value of the investment. To allow direct comparisons of costs and benefits, the NPV expresses present value for cash transfers happening at different times. In this framework, costs and benefits during a working-age life are transferred back to the start of the investment. This is done by discounting all cash flows back to the beginning of the investment with a fixed interest rate (discount rate).

To set a value for the discount rate, long-term government bonds have been used as a benchmark. The choice of discount rate is challenging, as it should reflect not only the overall time horizon of the investment, but also the cost of borrowing or the perceived risk of the investment (Box A5.1). To allow for comparability and to facilitate the interpretation of results, the same discount rate (2%) is applied across all OECD countries. All values presented in the tables in this indicator are in NPV equivalent USD using purchasing power parities (PPPs).

The source for the direct costs of education is the UOE data collection on finance (year of reference 2017 unless otherwise specified in the tables).

The data on gross earnings are based on the OECD Network on Labour Market and Social Outcomes earnings data collection, which compiles data from national Labour Force Surveys, EU Statistics on Incomes and Living Conditions, Structure of Earnings Surveys, and other national registers and surveys. Earnings are age-, gender- and attainment-level specific. For the calculation of this indicator, data on earnings have been pooled from three different years (2015-17).

Income tax data are computed using the OECD Taxing Wages model, which determines the level of taxes based on a given level of income. This model computes the level of the tax wedge on income for several household composition scenarios. For this indicator, a single worker with no children is used. For country-specific details on income tax in this model, see Taxing Wages 2018 (OECD, 2018[5]).

Employee social contributions are computed using the OECD Taxing Wages model’s scenario of a single worker aged 40 with no children. For country-specific details on employee social contributions in this model, see Taxing Wages 2018 (OECD, 2018[5]).

References

[2] Brys, B. and C. Torres (2013), “Effective personal tax rates on marginal skills investments in OECD countries: A new methodology”, OECD Taxation Working Papers, No. 16, OECD Publishing, Paris, http://dx.doi.org/10.1787/5k425747xbr6-en.

[4] OECD (2019), Pensions at a Glance 2019: OECD and G20 Indicators, OECD Publishing, Paris, https://dx.doi.org/10.1787/b6d3dcfc-en.

[3] OECD (2018), Education at a Glance 2018: OECD Indicators, OECD Publishing, Paris, https://dx.doi.org/10.1787/eag-2018-en.

[5] OECD (2018), Taxing Wages 2018, OECD Publishing, Paris, https://dx.doi.org/10.1787/tax_wages-2018-en.

[1] OECD (2017), Education at a Glance 2017: OECD Indicators, OECD Publishing, Paris, http://dx.doi.org/10.1787/eag-2017-en.

Table A5.1 Private costs and benefits for a man attaining upper secondary education (2017)

Table A5.2 Private costs and benefits for a woman attaining upper secondary education (2017)

Table A5.3 Public costs and benefits for a man attaining upper secondary education (2017)

Table A5.4 Public costs and benefits for a woman attaining upper secondary education (2017)

WEB Table A5.5 Private costs and benefits for a man attaining tertiary education (2017)

WEB Table A5.6 Private costs and benefits for a woman attaining tertiary education (2017)

WEB Table A5.7 Public costs and benefits for a man attaining tertiary education (2017)

WEB Table A5.8 Public costs and benefits for a woman attaining tertiary education (2017)

WEB Table A5.9 Private/public costs and benefits for a man attaining tertiary education, by level of tertiary education (2017)

WEB Table A5.10 Private/public costs and benefits for a woman attaining tertiary education, by level of tertiary education (2017)

StatLink: https://doi.org/10.1787/888934162546

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