Estimation of Drivers of Public Education Expenditure: Baumol’s Effect Revisited

IMF Working Papers, July 28, 2015

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The paper analyzes drivers of rising per-pupil public education spending, including Baumol’s “cost disease” effect.
Higher wages paid to teachers contributed significantly to the increase in per-pupil spending over the past decades.
Empirical analyses using a large dataset of advanced and developing economies show that the contribution of Baumol’s effect was much smaller than implied by theory.
The spending increase reflects rising wage premiums paid for teachers in excess of market wages, especially in middle-income countries.
The strong wage premium effect suggests that institutional characteristics that govern teachers’ wage setting are key determinants of education expenditure.

Dataset: large dataset of advanced and developing economies (no additional breakdown provided on the landing page).
Key empirical conclusion: Baumol’s effect contribution << theoretical implication; wage premiums for teachers explain a larger share of per-pupil spending growth.
Geographic emphasis noted in keywords: Sub-Saharan Africa is listed among subjects/keywords, and middle-income countries are highlighted in the findings.

Institutional characteristics that govern teachers’ wage setting are identified as key determinants of public education expenditure.
Implication: policies addressing teacher wage-setting institutions and wage-premium formation are central to managing public education spending trends.

Subjects: Capital spending, Education, Education spending, Expenditure, Labor, Wages
Keywords: Baumol’s effect, Capital spending, Education spending, growth assumption, institutions, premium effect, public education, Public education expenditure, Sub-Saharan Africa, teacher-pupil ratio, wage premium, Wages, WP