Education

Introduction

Education plays a vital role in the development of a nation, both in absorbing modern technology and providing the capacity for self-sustained growth. Education is more of a concern for developing nations. There is a classic convergence case for developed countries, but Sub-Saharan Africa has obvious issues of development according to empirics where enrolment rates are much lower than similarly populated countries. Alongside other data sources, the empirics infer a relationship between development and education does indeed exist. So I will first discuss the ways in which education can provide private and social returns, and move on to appropriate methods of computation.

Rate of Return

On average, better-educated workers earn higher wages. It may lead to better knowledge and productive skills, or even enhance the ability to learn for the individual. Educational certificates may signal the employee’s added value and therefore receive greater income opportunities. Though it is important to note that for education to enhance earnings, educated workers need opportunities in the labour market.

In order to test the private returns, there is a need for randomized control trials or quasi experiments, in order to control for exogenous variables that may impact the educational returns. One possibility would be to quantify the contribution of education to earnings between higher educated and non-higher educated workers. Signalling of education qualifications could be tested between workers with varying levels of attainment. Fundamentally though, the private rate of return is that which equalises the present discounted value of benefits and costs. The benefits consist of private incentives for student’s family to enrol in a school, increased wage opportunities after taxes and increased consumer benefits. The costs could be the value of the student’s time whilst in school, and the direct financial burdens.

Patrinos (2004) measured the ROI in education, and saw that there existed a significant increase between secondary and higher education for private ROI. The tertiary level ROI is substantive compared to other levels of attainment. Another more common measure of the rate of return is the Mincerian rate. This is a statistical quantification of the impact of an extra year of schooling on income – a wage increment parameter – used to estimate the benefit of education.

The coefficient, r, for the year of schooling on income generation is rather substantial in empirical work. For Latin America and Sub-Saharan Africa, there exists a respective 12% and 11.7% increment in wages after an additional year of education. However in many developing nations, most workers do not work for wages. Restricting for only wageworkers may bias estimates then. School quality and varying inputs to education are disregarded in the regression, so that it may be better to observe productivity in schooling in a more sophisticated way where one can account for endogeneity and effective schooling investments. Furthermore, can the rate of return be applied to all income groups evenly? Compensation variations amongst senior managers may not reflect educational attainment and a corresponding output of human capital. It is difficult to justify James Dimon’s (JP Morgan CEO) annual salary of $41.99m by a generic regression like the Mincerian rate of return. This highlights that more factors need to be...

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