Empirical Analysis of the Impact of Education on Economic Growth Assignment

Assignment Task

Abstract

Education is a crucial factor for sustainable economic growth. Therefore, public expenditures on education are of great interest to both researchers and policy makers. The channels through which education affects economic growth differ according to the level of development of the country. This study aims to measure the impact of public expenditure on education for economic growth in North Macedonia. The data used are secondary data derived from the World Bank Indicators for the period 1917–2020. The econometric model employed in this study is an Instrumental Variable Two-Stage Least Square. The dependent variable in the model is Gross Domestic Product and the independent variables in the model are public expenditures on education, labor force participation rate, gross capital formation, unemployment, industry, wages, employment, information, and communication technology, and the instrumented variable is tertiary enrolment. This study suggests that a one-point increase in public expenditures on education will positively affect economic growth in the North Macedonia. The study also shows that a one-point increase in unemployment will increase economic growth and a one-point decrease in employment will increase economic growth in North Macedonia. These two results, which contradict the theoretical and empirical approaches, prove the mismatch between the supply and demand of real occupations in the labor market in North Macedonia.

Introduction

Education is a very important pillar that contributes to society in all its dimensions. In this prism, primary, secondary, and higher education as a public investment is a topic of discussion in terms of its impact on economic growth. Encouraging improvement and development, not only in the economic sphere but in all spheres of life, depends on expectation. Incentives for schooling preceded expectations. If the educated expect that their education will improve their welfare, then the intention to educate will increase, raising productivity and boosting the economic growth of the country in general. Education is the critical factor for a nation that promotes economic growth. Hanushek and Woessmann explained economic growth as a function of the quality of education, but they did not find evidence of the importance of years of schooling, but they argued for the relevance of cognitive skills and a basic literacy ratio for economic growth (Goczek et al. 2021). The benefits of a child’s education accrue not only to the child as an individual or to his or her parents, but also to other members of society. Thus, my child’s education contributes to your well-being by promoting a stable and democratic society (Friedman and Friedman 2002).

The fact that most goods, including education, have dual effects, such as self-benefit and externalities, broadens the horizon to define the nature of education as a public good. Education as a public good is thus seen as a combined good that has the characteristics of two goods: (i) private property and (ii) public property, as a result of the benefits that accrue from the educational process (Musgrave 1969).

Following Solow’s model (Samuelson and Solow 1956), if public expenditures on education are productive, it is probably under the pretext of investing in human capital, but this only affects the factorial equilibrium and not economic growth and generally has side effects in economic growth. According to this model, the authors can also say that this theory does not show the same results if the authors consider the level of economic development of the country as well as the productivity of expenditures dedicated to education. This approach is different from the economic development of the country and the policy of public spending on education.

Investing in education means, first and foremost, investing in human resources, i.e., creating a skilled labor force that will influence the creation of innovations, increase productivity and wages, reduce the demands on the state to finance various social programs, and increase the state budget by accumulating taxes, and all this is expected to have a positive impact on the economic growth of the country. The benefits of investing in education do not end here. In fact, there is a long, not to say endless, list of benefits to the state and society from adequately educating the population, starting with increasing the number of skilled workers, creating appropriate profiles based on the demands of the labor market while meeting the needs of the market, increasing productivity and wages, and improving living standards, thereby growing the country’s economy while increasing social welfare.

From this point of view, the main aim of this study is to measure the impact of public expenditures on education on the economic growth of North Macedonia. Education has always been considered the main pillar of the economic growth of a nation. How education affects economic growth has been studied by different scholars at different times and in different countries. The basic idea of this study lies in the research problem, which is the rationale for public expenditures on education as a public good and the way these expenditures affects economic growth, in the case of North Macedonia.

Research Objectives

(a) To highlight the importance of education on economic growth;

(b) To measure the impact of public expenditures on education on economic growth using related variables-instrumental variable;

(c) To measure the impact of other related macroeconomic indicators in the economic growth

Research Questions

(a) How do public expenditures on education affect economic growth?

(b) How do other interrelated variables, such as employment, unemployment, gross capital formation, ICT sector, and industry affect economic growth in the case of North Macedonia as a developing country?

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