6. Conclusion
The recent publications of international comparative student achievement tests such as PISA
and TIMSS have spurred the debate on quality of public education in many countries. Indeed,
empirical analyses suggest that it is quality of the educational outcome rather than quantity,
expressed in terms of years of education, that matters to economic growth. While most of the
discussion has been centered around educational resource use and institutions, analyses of
macro incentives implicit in economic policy are limited. At the same time, there is an
ongoing debate whether the welfare state has excessively grown over the last decennials
leading to hampered macro-economic growth through bureaucratic waste and high income
taxation. Indeed, recent happiness research suggests that government consumption spending
reduces welfare in society, both at the individual as well as at the aggregate level (Bj0rnskov,
Dreher and Fischer, 2007 and 2008). This paper aims to contribute to these discussions by
empirically linking the quality-of-education-question to the size-of-welfare-state-debate.
This paper is among the first analyses which provide an investigation into the effects of the
size of the welfare state on investment in human capital during mandatory education. First, we
develop a simple economic model that demonstrates how individuals’ optimal investment in
human capital declines in the generosity of the welfare system. In our empirical analysis, we
test the impact of a variety of welfare state measures on student achievement in Mathematics
and Science at the lower secondary education level We employ a panel of up to 72
participating countries during the period 1980-2003, making the test scores comparable across
testing institutions, test years and ways to assess student performance. In fixed effects panel
models that account for unobserved country heterogeneity, we identify a student performance
deteriorating impact of a more generous welfare state, measured by either general government
consumption spending, the progressivity of the income tax system, and, for OECD countries,
more narrowly by social welfare spending on households and persons. An investigation into
the single components of social spending reveals the dominance of redistributive pension
systems and active labor market policies for creating disincentives to human capital
investment.
Overall, this paper contributes to the branch of empirical (and theoretical) literature which
suggests that cuts in the welfare state and government consumption spending might have
beneficial effects for society - in both OECD and non-OECD countries. However, reality
often is more complex and a differentiated view is advisable. The policy implications from
our empirical results are limited by, e.g., the fact that findings in form of econometric ‘point
estimates’ always must be interpreted as marginal, ‘local’ changes. Thus, our results cannot be
interpreted as if it were optimal in terms of student performance to cut government spending
down to zero, abolish state pensions systems or cease to redistribute income via the tax
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