Earnings and Education in Latin America- George Psacharopoulus

7/25/2019 Earnings and Education in Latin America- George Psacharopoulus

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,JV

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Policy Research

WORKING PAPERS

Education

nd Employment

Technical epartment

LatinAmericaand he CaribbeanRegion

The WorldBank

December1992

WPS

1056

Earnings

nd

Education

in

LatinAmerica

Assessing

Priorities

for Schooling

nvestments

George

Psacharopoulos

and

YingChu Ng

In most Latin Americancountries, the earnings premium re-

ceivedby graduates

of highereducation

decreased n the 1980s.

Investment n primaryeducation

hows he highest

ate of return

among all levels considered.

ThePolicyResearch

Working

apersdissemninatehefindings f

work n progress nd

encouragetheexchangeof

deas

mongBank taff

andall others nterested

ndevloprenttissues

Thesepapers, istLibutedy

he ResearchAdvisory

Staff, arry henames

of he authors,

reflectonlytheirviews,andhould eusedandcitedaccordingly.Thefmdings,intespretations,

ndconclusions retheauthors'own.They

shouldnot be attributed o the WorldBank, ts Boardof Dircwtors,

ts management, r any of ts member ountries.


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PolicyResearchl

Education nd Employment

WPS

1056

This paper- a product

of the Technical Department, Latin America

and the Caribbean Region

-

is part

of a larger effort in the department

to document the role of education in the region's development

efforts.

Copies of the paper are

available free from the World

Bank, 1818 H Street

NW, Washington, DC 20433.

Please contact

Liliana Longo, room 14-187,

extension 39244 (December

1992, 93 pages).

Psacharopoulos

and Ng use household

survey sector

of employment,

by nature

of the second-

dzta for 18 Latin

American countries

to assess

ary

school curriculum, and over

time.

earnings differentials by level of education, and

to assess how these differentials changed in

the The results show

that, in most countries, the

1980s.

earnings premium received by graduates of

higher education decreased

in the 1980s.

Invest-

Introducing

the cost

of education allows

ment in primary education

shows the highest

rate

them to estimate private and social rates of return of return among all levels considered

-

and is

on investments on education

across several still the

number one investment

priority in most

dimensions: by

gender, by level

of education,

by countries.

The PolicyResearch

WorkingPaperSeriesdisseminates

he indingsof work

underway n the

Bank.Anobjectiveof theseries

is to get these findings out quickly,even if presentations re less than fully polished.The findings, nterpretations, nd

conclusions n thesepapersdo not necessarily epresentofficialBankpolicy.

Producedby the PolicyResearchDissemination enter


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EARNINGS AND EDUCATION IN LATIN AMERICA:

ASSESSING

PRIORITIES

FOR SCHOOLING

INVESTMENTS

George Psacharopoulos

Ying Chu Ng

Technical Department

Latin America and the Caribbean Region

The World Bank


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TAxi

OF

CONTW8

I. Introduction

..

..

..

. ..

.,,,,,.,,,,.,

..........

v.

1

.

II.

Methodology

...................................

..

..

.

3

TheFull Discountingor Elaborate Method

................

3

The

Earnings

Function

Method

...............................

6

The

Short-cut

Method

.

.........

. .....

.

,......

. ...

8

III.Empirical

Findings

.....

.............

.....

.

8

Basic

Earnings

Functions

...................................

9

Overtime

Changes

n Relative

Earnings

..

14

Overtime

Returns

to

Education

.......................

.....

20

Extended

Earnings

Functions

....

..

.............

.......

25

Secondary

Generalersus

Vocational

ducation

..

.

...........

28

Private

Returns

to

Education

29

Social Returns to Education

.... ...................

......

31

IV.

Conclusion

...

..

.

..

.

.

. .

.......

.

37

References

.......

39

Annex

. Survey

Data

Description

0.00000.....0.0.0.41

Annex

.

Variable

Definitions

..

..

....

0.0......

.44

Annex

.

Basic

Eanings

Functions

.....

.............

0...

48

Annex

4.

Extended

Earnings

Functions

............

77


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LIST

OF TABLES

1.

Mean

Earnings,

Years

of Schooling

and

Mincerian

Returns

to

Education:

Entire

Sample,

circa

1989 ...........

;.......

10

2.

Mean

Earnings,

Years

of Schooling

and Mincerian

Returns

to

Education:

by

Gender,

circa

1989

....

..

12

3.

Mean

Eamings,

Years

of Schooling

and

Mincerian

Retums

to Education:

by

Sector,

circa

1989..

13

4.

Over

Time

Earnings

Differentials

by Educational

Level

5

5.

Over Time

Educational

Attainment

of

the

Labor Force

.18

6. Mean Earnings, Years of Schoolingand Mincerian Returns to Education: Entire

Sample,

circa

1980

...............

.21

7. Mean

Earnings,

Years

of

Schooling

and

Mincerian

Returns

to Education:

by

Gender,

circa

1980

..

22

8.Mean

Earnings,

Years

of

Schooling

and

Mincerian

Returns

to

Education:

by Sector,

circa

1980

.24

9. Mean

Earnings

and Mincerian

Returns

to

Education:

by

Level

of Education

......

26

10. Private Retums to Educationby Level of Education:Full Method .30

11. Social

Direct

Unit

Cost

per Year

by

Level

of

Education

33

12.

Social

Returns

to

Education

by

Level

of Education:

Full

Method

.

35

13. Index

of Public

Subsidization

of

Education

byLevel

......

38


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Lwsr

OF

FIGURES

1. Age - Earnings Profiles by Level of Education, Brazil 1989 ................

5

2.

Time Trend

of

Earnings Differentials

by Level

of Education

in Four

Countries

....

17


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I. INTRODUCrION

The study of the relationshipbetween earnings and education has been the cornerstone

of the economics of education. There are several reasons why this relationship has been

investigated extensively throughout the world since "human capital" was established in the

economic growth and development iterature in the early 1960s (see Schultz,

1961).

First, differences n mean earnings between graduates of successive evels

of education

reflect the premium

associated with educational investment. This premium is definitely

"private", in the sense that it accrues

to the person who undertook the investment. Under

certain conditions, however, this premium can also be used as a proxy for the higher social

productivityof the graduate, e.g. as evidencedby earningsdifferentials n the competitive ector

of the economy.

Thus, earnings differentials by level of education provide an expedient,

empirical way of documenting first order relative scarcities in the market for graduates in a

given society, and may provide a guide for educational nvestments.

Second, the above earnings premium can be combined with the cost (either private or

social) of investing in different levels of education, thus leading to a cost-benefit analysis of

investment n schooling, which is very similar o traditionalcost-benefitanalysis n other sectors

of the economy. Since the 1960s there has been an immense literature devoted to the

profitability of investments n human capital. Estimates of such profitability are better known

as "rates of return to investment n education" (for a review see Psacharopoulos, 1985a).


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Third,

and beyond the above efficiencyconsiderations,

he earnings premium associated

with different levels of education leads to equity assessments n a given society, e.g. how does

the provision of education, and at what level, contributes o poverty alleviation or a more equal

income distribution?

The purpose

of this paper is to present evidenceon the

relationshipbetween earningsand

education in Latin America for the latest year possible, and to discuss the implicationsof the

findings for school investmentpriorities in the region. The analysis s necessarilymacro, in the

sense that a large number of countries has been covered, using a consistent methodology,

althoughat the expense

of performing more detailedwithin-countryanalyses. Thus the findings

presented

here should be considered

as indicativeregarding educational nvestmentpriorities in

the region, pending more detailed country-specificwork.

This study improves upon the previous cross-country studies by applying a consisten.

mrethodology f estimation '. Moreover,

the database comes from representative

national data

sets of the countries in question. The data also allow for the study of time trends of rates of

return to cducation, as well as assessing the profitability of different types of the secondary

school curriculum.

The next section presents the methodologyof estimation, followed by a section on the

evidence. The implicationsof the findings are discussed n the concluding section.

I/ Previous tudieson the returns o educationn LatinAmerica re listed n the Peferences.


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-3-

II.

MErHODOLOGY

Estimates

of

the profitability

of

investment

n

education

can be

arrived

at

using different

methods.

The

method

adopted

by

various

authors

is often

dictated

by

the

natureof

the

available

data.

In what

followswe

briefly

describe

the

available

methods

as background

o

the

estimates

,we

present

later

in

this paper.

(1)

The Full

Discountinlg

r

Elaborate

Method

This methodamounts o findingthe discountrate (r) that equatesa streamof benefitsto

a

stream

of costs

at

a given

point

in

time:

=

y +C)C +r)

(1)

:-+1

+r)

t-I

where

(Yb-Ya)t

s the

earnings

differential

between

a more

educated

person

(subscript

b) and

a

less

educated

person

(subscript

a, the

control

group).

Cbrepresents

thedirect

costs

of schooling

consisting

of tuition

and

fees, books,

etc.,

and Y.

denotes

the student's

foregone

earnings

or

indirect

costs.

On

the assumption

hat

the direct

costs

of acquiring

the

next

higher

level

of

education

are

roughlythe sameas the incomeone wouldearn from part-timeor summer ob during the study,

equation

(1)

can

be

simplified

o:


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-4-

*"1r)'

S(Y,)S(l

+r)

(2)

There is an important symmetry etweencomputinghe returns o primaryeducation

and those o the other evels. Primary chool hildren,mostly ged6 to .2 years,do not forego

earningsduring he entire engthof their studies. In theempirical nalysis hat followswe have

assumedonly two years of foregone arnings or primaryschoolchildren.

The resulting by solvinghe aboveequation an be considered

o be a "private" ate

of return. When

the direct cost paid by the

individual s replacedby the true

full cost of

someone's

ducation paid by

the state in mostcountries) ne can arrive at a "social"

ate of

return. Private

rates of return are used to explainpeople's behavior n seeking

educationof

different evelsand types, and as distributive

measures f the use of publicresources. Social

rates of

return, on the other hand,can be used o set investment

riorities or futureeducational

investments.

The

discoundng f actual net age-earnings rofiles s the most

appropriatemethodof

estimatinghe returns o education ecause t takes nto account he most

mportant art of the

earlyearninghistory

of the individual. But this method s very thirsty

n termsof data - one

must

have a sufficientnumber of observations n a given age-educationalevel cell for

constructing

well-behaved"ge-earnings rofiles. (An exampleof such profile is given

in

Figure

1.) This has beenrarely the case in the earlydays

of the economics f education, nd

thus researchers ave resorted

o lessdata-demanding ethods.


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Earnings and Education in Latin America- George Psacharopoulus