How many educated workers do you wish for your economy? European targets, optimal public spending, and labor market impact

This paper studies optimal taxation schemes of education in a search-matching model where the labor market is divided between a high-skill and a low-skill sector. Two public policy targets - maximizing the global employment level and optimizing the social surplus - are studied according to three different public taxation strategies. Using GAMS, we calibrate our model using evidences for fourteen European countries, and compare our results with the target from the Europe 2020 Agenda for higher education achievement. We show that, with the current labor market characteristics, the target decided by the governments seems compatible with the social surplus maximization objective in some countries while it is too high for other countries. Maximizing employment would imply, for all countries, higher educational spending than that required for the social surplus to reach its maximum.