Returns to schooling, ability and cognitive skills in Pakistan and India

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Monazza Aslam (presenter) University of Oxford, Faisal Bari, Lahore University of Management Sciences, Anuradha De, CORD, New Delhi, Geeta Kingdon, University of London and Rajeev Kumar, CORD, New Delhi.

This paper investigates the economic outcomes of education for wage earners in Pakistan and India. This is done by analysing the relationship between schooling, cognitive skills and ability on the one hand, and economic activity, occupation, sectoral choice and earnings, on the other. In the economics of education literature for South Asia, an important question remains largely unaddressed: what does the coefficient on ‘schooling’ in conventional earnings function estimates measure? While human capital theory holds that the economic return to an extra year of schooling measures productivity gains acquired through additional schooling, the credentialist view argues that it represents a return to acquired qualifications and credentials while a third, the signalling hypothesis, suggests that is captures a return to native ability. This paper seeks to adjudicate between these theories using data from unique and comparable surveys of more than 1000 households each in Pakistan and India, collected in 2007-08. The paper also examines the shape of the education-earnings relationship as a way of testing the poverty reducing potential of education in South Asia.

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