MORE SPENDING OR BETTER SPENDING? EDUCATION EXPENDITURE AND INCOME INEQUALITY IN OECD COUNTRIES

Abstract

The issue of income inequality is one of the most acute socio-economic issues of developed economies, including the countries of the Organisation for Economic Co-operation and Development (OECD). The public spending on education is largely viewed as an important policy tool in enhancing the development of human capital and alleviating inequality in income distribution. Nonetheless, there is contradictory empirical evidence on its effectiveness that is context specific. This paper examines the relationship between government spending on education and income inequality on the basis of a balanced panel data of OECD nations between 2000 and 2022. The panel data econometric tools used in the analysis are pooled Ordinary Least Squares (OLS), Fixed Effects (FE), and Random Effects (RE) models, and Hausman specification test to decide the best method of estimation. A Generalized Method of Moments (GMM) estimator is also used in order to bring strength and overcome endogeneity issues. The Gini coefficient is used to estimate income inequality and the education spending has been estimated in terms of percentage of GDP and other control variables, including GDP per capita, unemployment rate, and inflation. These findings show that increased governmental expenditure on education tends to reduce income inequality statistically significant among OECD countries, but the effect is however, different in individual countries with differing economic patterns and situations. These results demonstrate the need to not only expand the budgets on education but also make the public spending more efficient and targeted. Policy recommendations are made at the end of the study and they focus on strategic investment in inclusive and high-quality education systems to attain more equal distribution of income.