earnings and education in latin america- george psacharopoulus
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7/25/2019 Earnings and Education in Latin America- George Psacharopoulus
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,JV
PQ80
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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*"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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u
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