Education externalities: what they are and what we know

By now it is well known that education is associated with many beneficial effects in society. In the economics of education literature, these effects are typically measured by observing in the labour market the increased earnings or productivity of more educated workers relative to less educated ones.

However, there is a class of non-market or external benefits of education that have long been recognized but extremely difficult to measure. For example, to the extent that more education is associated with better health, healthier workers must enjoy higher earnings than measured solely on market wages. Another example is the extent to which more educated people are less prone to commit crime, hence saving society policing costs. Such savings are an additional benefit of education.

The report reviews the empirical studies on attempting to measure the non-market and external effects of education, coming to the conclusion that such effects are significant. For example, taking only the non-market health benefits of education, the rate of return on education investment could be as high as double the one estimated based on market wages alone (Martínez et al., 2016).

The significance of conducting all-inclusive cost-benefit analysis of education is that policy decisions could be reversed, e.g., subsidize a given level or type of education the social benefits of which exceed the cost of provision.

Authors

Daniel Münich and George Psacharopoulos

Cite as

European Commission: Directorate-General for Education, Youth, Sport and Culture, European Expert Network on Economics of Education (EENEE), Münich, D. and Psacharopoulos, G., Education externalities – What they are and what we know, Publications Office, 2018, https://data.europa.eu/doi/10.2766/309796