The pattern of return to education and its implications

Our recent policy brief no. 4 is devoted to discussing in some detail this important issue in the economics of education.    It is a joint output by myself, Prof. Geeta Kingdon (IoE) and Harry Patrinos.    Below I present a summary of the above paper to enable readers’ comments.    Those who are interested in the topic and wishing to see the full list of references for this paper could do so by visiting http://recoup.educ.cam.ac.uk/publications
While education has many important non-market benefits, it is also valued for its role in helping people to become more productive, have higher earnings and avoid poverty. The extent to which education raises earnings is loosely called the economic ‘return’ to education. Estimates of private and social returns to different levels of education have been undertaken for a large number of developing and developed countries.  Studies show that, internationally, one additional year of education adds approximately 10% to a person’s wage, at the mean of the distribution. 

Until recently, the evidence has suggested that the returns in developing countries are generally larger at primary level than at secondary and higher levels of education.  Some have interpreted this to be consistent with a notion of diminishing returns to education.  A pattern of high returns to primary and lower returns to subsequent levels of education indicates that even where most children leave the system at or before the end of primary school, poor families are still likely to value educational outcomes highly.  Thus, primary schooling – even where it is terminal – has historically been interpreted to be a profitable investment of time (and money, to the extent that direct costs have to be met) for the poor.

However, more recent evidence suggests that the rate of return to primary education may now be lower than that to post-primary levels of education .  A number of studies using 1990s and early 2000s cross-section data find that the return to primary education in wage employment is significantly lower than that to post-primary education.   Blom and Verner (2001) find that between 1982 and 1998 in Brazil, returns to tertiary education increased sharply while returns to primary and lower secondary education dropped. Riboud, Savchenko and Tan (2006) find that between early 1990s and early 2000s, rates of return to higher secondary and tertiary education increased in India, Pakistan and Sri Lanka. Mehta et. al. (2007) find that the education earnings relationship became more convex in Thailand, Philippines and India over the 1990s. Fiszbein et. al. (2007) show that in Argentina over the period 1992 to 2002, returns to primary education decreased, returns to secondary remained stable and returns to higher education increased substantially, with university education exhibiting the highest returns by 2002. Lachler (1998) finds that in Mexico between 1984 and 1994, the marginal return to primary education (i.e. the return to each extra year of primary education) fell by 3.1 points (from 16.9 to 13.8%) and marginal returns to both secondary and higher education rose, with the latter nearly doubling (from 10.3 to 19.9%). This pattern of decrease in primary returns in Mexico is also confirmed in Psacharopoulos et al (1996). Finally, a study of 16 Latin American countries (CEPAL, 2002), and another of 18 Latin American countries (Behrman et. al., 2003), concludes that returns to tertiary education have greatly increased in the 1990s whilst those to primary and secondary education have fallen.

Here I will not discuss the possible causes of such changes in rates of return.   These are discussed in some detail in the latest issue of the RECOUP policy briefs (http://recoup.educ.cam.ac.uk/publications/pb4.pdf). 

The findings on the changed pattern of wage returns to education have potentially important policy implications for both labour market policy and education policy in the context of poverty reduction .  Firstly, they have implications for the pattern of public funding of education. In particular, given its very high returns, large universal subsidies may not be needed to motivate students to enrol in tertiary education although if credit market failures deny poor people access to profitable tertiary education, there may still be a need for state intervention for equity reasons . Secondly, in those cases where returns to primary education have been falling, its direct poverty-reducing potential is thereby reduced, so that less reliance can now be placed on primary school completion as a strategy for poverty reduction than in the past.

 However, the fact that primary education has lower earnings increments reducing its poverty-mitigating potential – should not be taken to suggest that the overall rationale for investments in primary education is weakened. There are several reasons for this. Firstly, primary education is a necessary input into further levels of education which may have higher economic returns. If the benefit that primary education confers by permitting access to more lucrative levels of education is taken into account, its ‘true’ return will increase. Secondly, whatever its economic return, primary education continues to be important for its intrinsic value in a rights-based perspective. Thirdly, returns to education have been estimated mainly using wages; yet waged workers constitute typically a small fraction of the total workforce in many developing countries and the pattern of returns to education in self-employment and agricultural employment could be different. Similarly, the size of the positive economic externalities of basic education could be greater than those of other levels of education, though there is little testing of this issue. Finally, basic education is valued not only for its economic benefits but also for its non-market benefits (reductions in fertility and mortality, empowerment, better environment, lower crime, democratic participation, etc).

There is persuasive evidence that basic education has substantial beneficial non-market externalities, although it is not straightforward to assign monetary values to these or to integrate them into a single measure of the overall return to education (McMahon, 2001).  Each of these factors continue to underpin the case for the public financing of education throughout the basic cycle.

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