: Estimating the Payoff to Schooling using the Standard Mincerian Model. Using data from Indonesia Family Life Survey (IFLS) wave IV, this paper empirically estimates the private rates of return to education in Indonesia. The result from ordinary least-squares estimate shows that one year of schooling increases an individual's earnings by 5.66 percent. Futhermore, Standard Mincerian Earnings function estimates reveal a gender asymmetry in private economic returns to schooling, with returns to women's education being substantially and statistically significantly higher than men's

Purnastuti, L. (Losina)

Jurnal Economia

Abstract: Estimating the Payoff to Schooling using the Standard Mincerian Model. Using data from Indonesia Family Life Survey (IFLS) wave IV, this paper empirically estimates the private rates of return to education in Indonesia. The result from ordinary least-squares estimate shows that one year of schooling increases an individual’s earnings by 5.66 percent. Futhermore, Standard Mincerian Earnings function estimates reveal a gender asymmetry in private economic returns to schooling, with returns to women’s education being substantially and statistically significantly higher than men’s. 

 

Keywords: Return to Schooling, Standard Mincerian Earnings Function

 

Abstrak: Mengestimasi Hasil Investasi Pendidikan Menggunakan Model Mincerian Standar. Menggunakan data Indonesia Family Life Survey (IFLS) IV, artikel ini secara empiris mengestimasi “rates of return” investasi pendidikan di Indonesia. Hasil dari estimasi dengan menggunakan pendekatan OLS menunjukkan bahwa setiap tambahan satu tahun sekolah akan meningkatkan pendapatan individu sebesar 5.66 persen. Estimasi fungsi pendapatan Standard Mincerian mengindikasikan perbedaan “return to schooling” antara perempuan dan laki-laki. “return to schooling” perempuan lebih tinggi dari pada “return to schooling” laki-laki.

 

Kata Kunci: Kembalian Investasi Pendidikan, Fungsi Pendapatan Standar Minceria

Losina Purnastuti

Directory of Open Access Journals

Jurnal Economia, Volume 8, Nomor 2, Oktober 2012214ESTIMATING THE PAYOFF TO SCHOOLINGUSING THE STANDARD MINCERIAN MODELLosina PurnastutiYogyakarta State Universitylosina_purnastuti@uny.ac.idAbstract: Estimating the Payoff to Schooling using the Standard Mincerian Model.Using data from Indonesia Family Life Survey (IFLS) wave IV, this paper empiricallyestimates the private rates of return to education in Indonesia. The result fromordinary least-squares estimate shows that one year of schooling increases anindividual’s earnings by 5.66 percent. Futhermore, Standard Mincerian Earningsfunction estimates reveal a gender asymmetry in private economic returns toschooling, with returns to women’s education being substantially and statisticallysignificantly higher than men’s.Keywords: Return to Schooling, Standard Mincerian Earnings FunctionAbstrak: Mengestimasi Hasil Investasi Pendidikan Menggunakan Model MincerianStandar. Menggunakan data Indonesia Family Life Survey (IFLS) IV, artikel ini secaraempiris mengestimasi “rates of return” investasi pendidikan di Indonesia. Hasil dariestimasi dengan menggunakan pendekatan OLS menunjukkan bahwa setiaptambahan satu tahun sekolah akan meningkatkan pendapatan individu sebesar 5.66persen. Estimasi fungsi pendapatan Standard Mincerian mengindikasikan perbedaan“return to schooling” antara perempuan dan laki-laki. “return to schooling”perempuan lebih tinggi dari pada “return to schooling” laki-laki.Kata Kunci: Kembalian Investasi Pendidikan, Fungsi Pendapatan Standar MincerianIntroductionAlthough the returns to education hasbeen a topic of considerable interest in theempirical labour and education economicsliteratures for around 50 years, the analysisof returns to education remains a relevantissue for both the developed and thedeveloping economies. Numerous studies,for many different countries and timeperiods, have confirmed that better-educated individuals receive higher wagesand have occupations of higher status thanless-educated individuals. For mostdeveloped countries, there is generalagreement over the size and the patterns ofthe return to education across sub-groups ofthe population. In terms of the empiricalfindings from developing countries,however, there has been an ongoing debateconcerning even the magnitude of thereturns to schooling. Some studies, forexample, provide evidence of a relativelylow private return to schooling indeveloping countries, whereas there arenumerous other empirical studies that findthat the return to schooling is quite high.Despite the voluminous empirical literatureson the returns to schooling in lessdeveloped countries, to date there havebeen only a limited number of studies basedon Indonesian data. The current set ofEstimating the Payoff to Schooling using the Standard Mincerian Model -- Losina Purnastuti215analyses for Indonesia therefore has thepotential to fill a major gap in the literature.The plan of the paper is as follows. In thenext section the empirical model andestimation methods will be discussedbriefly. Results and interpretation areexplored in Section 3. Finally, Section 4concludes the paper.MethodThe specification of the earningsequation used below is based on the humancapital model developed by Mincer (1974).According to this model, the log of earningsin a given time period can be decomposedinto an additive function of a lineareducation term and a quadratic workingexperience term,ln(݁ܽ ݊ݎ ݅݊ (௜ݏ݃ = ଴ߚ + ଵ݁݀ߚ +௜ݑ ଶߚ +௜݌݁ݔଷߚ ௜݌݁ݔଶ + ௜ߝwhere earnings is monthly earnings forindividual i, edui is years of schooling forindividual i, expi is a measure of workexperience for individual i, ௜݌݁ݔଶ isexperience squared for individual i, and iߝ isan unobservable random variable, and β1,β2, andβ3 are unknown parameters to beestimated. According to human capitaltheory β1 = r, and so the estimatedregression coefficient β1 is interpreted asthe average private rate of return to oneadditional year of schooling. The Mincerianmodel assumes that (i) the only costs ofschooling are the foregone earnings, and (ii)each individual starts working immediatelyafter completion of school. Furthermore,this relationship provides a direct measureof the returns to schooling through thecoefficient of the years of schooling variablein the earnings regression.The data set used in the empiricalanalysis is the Indonesian Family Life Survey4 (IFLS4). The coverage area of the surveycan be seen in Figure 1. The survey collectsdata on individual respondents, theirfamilies, and their households. IFLS4 wasfielded in late 2007 and early 2008. It was acollaborative effort by RAND, the Center forPopulation and Policy Studies (CPPS) of theGadjah Mada University, and Survey Meter.Figure 1. IFLS Survey Coverage (Source: IFLS, http://www.rand.org/labor/FLS/IFLS.html)Jurnal Economia, Volume 8, Nomor 2, Oktober 2012216For the analysis of the private returns toschooling, the sample is restricted toindividuals 15 to 65 years old, who were notfull-time students, reported non-missinglabour income, and provided information onschooling. Persons in the military during thesurvey week are omitted, as it is generallyargued that the wages of those in the armedforces do not necessary reflect marketforces. A total of 4596 observations satisfythese criteria and are utilized in the analysis.Results and DiscussionThe analysis commences with resultsfrom the standard Mincer equation. In thissection, OLS estimates of the earningsfunction parameters are reported, assumingeducation to be exogenous. Theeconometric analysis of the private returnsto schooling are estimated using the basicMincerian function, where, as described inprevious section, the natural logarithm ofearnings is regressed on years of schooling,potential work experience and its squaredterm. The results are reported in Table 1.Table 1 presents the OLS coefficientsestimated for the total sample and for malesand females, separately. The Chow testsreject the null hypothesis of equality of theregression coefficients for males andfemales. The three standard models explainfrom about 19 to about 26 percent of thevariation in actual earnings, figures whichare comparable to other studies in theliterature. All the coefficients reported inthe table have the expected signs and arestatistically significant at the level of α = 0.01.According to the Table 1 results, anadditional year of education is associatedTable 1. OLS Estimates of Standard Mincerian Earnings Functionall male femaleConstant 5.12447(0.02718)***5.25857(0.03354)***4.92210(0.04398)***Years of Schooling0.05663(0.00172)***0.05278(0.00206)***0.06459(0.00290)***Experience0.01603(0.00195)***0.01224(0.00240)***0.01540(0.00327)***Experience2 -0.00023(0.00005)***-0.00015(0.00006)***-0.00023(0.00008)***R2 0.2051 0.1899 0.2585Observations 4596 3065 1531Chow test 63.53p-Value 0.0000Notes: Robust standard errors in parentheses. *, ** and *** denote statisticalsignificance at the 10 percent, 5 percent and 1 percent levels, respectively.Estimating the Payoff to Schooling using the Standard Mincerian Modelwith an annual 5.66 percent, 5.23 percent,and 6.46 percent increase in earnings forpooled, male, and female samplesrespectively. These estimates of the returnto schooling in Indonesia are susmaller than the Psacharopoulos (1981)average estimate of 14 percent for LessDeveloped Countries, and thePsacharopoulos (1994) average estimate of9.6 percent for Asian countries. Howeverthese results are in agreement with someempirical studies, for example: Flanagan(1998) in the Czech Republic, Maurerand Dinh (2004) in China, Aromolaran (2006)in Nigeria, and Aslam et al.Pakistan.The estimates of the return to schoolingfor females (6.46 percent) are higher thanthose for males (5.28 percent). The tconfirms that these differences arestatistically different, indicating thatschooling is more financially rewthe labour market for females than formales. This result is consistent with theFigure 2(Source: Author’s calculation0.001.002.003.004.005.006.007.00ReturntoSchooling(%)bstantially-Fazio(2010) in-testarding infindings of many empirical studies, such asBehrman and Deolalikar (1993) in Indonesia,Miller et al. (1997) in Australia, Flanagan(1998) in the Czech Republic, Bru(2000) in Italy, LopezMexico, and Asadullah (2006) in Bangladesh.Comparison of the return to schoolingamong the three specifications from Table 1is provided in Figure 2. Using eitherpotential work experience in the earnifunction to estimate the returns toschooling yields a range of 5.28 to 6.46percent increase in earnings associated witheach additional year of schooling.The coefficients on the potential labourmarket experience variable and its squaredterm have the expected signs, and portraythe usual concavity of the experienceearnings profile. The payoff varies with thelevel of potential work experience. Amonglabour market entrants (experience = 0) thereturn estimated for the total sample is 1.6percent. At 10 years of potential labourmarket experience the return is 1.14. The Standard Mincerian Return to Schoolingbased on Table 1)All Males Females5.665.286.46Observations Categories-- Losina Purnastuti217nello et al.-Avecedo (2001) inngs-Jurnal Economia, Volume 8, Nomor 2, Oktober 2012218percent, and at 20 years of potential labourmarket experience the return is 0.68percent. The increase in earnings associatedwith additional labour market experiencefor females exceeds that for males up toaround 20 years of experience. For example,among labour market entrants it is 1.54percent for females and 1.22 percent formales. At experience = 10 it is 1.08 percentfor females and 0.92 percent for males.Beyond 20 years of experience, however,the increase in earnings per year of labourmarket experience for males exceeds thatfor females, and for a number of years (e.g.at experience = 25 and experience = 35) it ispositive whereas that for females isnegative. This gender difference in thepayoff to experience across levels ofexperience could be due to the followingreasons. First, it could reflect a cohorteffect, where the younger female workers inthe sample have joined the labour forceunder different - perhaps more favourable -circumstances than the older femaleworkers in the sample. Second, it couldrelate to selectivity in labour forceparticipation. In the young cohort, femalesin the labour force may be heavily selectedtoward more able and talented individuals.Third, the younger cohorts in the sampletend to have better education than theolder cohorts in the sample, and there maybe complementarities between labourmarket experience and the level ofeducation.Also of interest is the level of experienceat which the predicted experience-earningsprofile peaks. This is where መଶߚ + መଷߚ2 =ݎ݌݁ݔFigure 3. Experience - Earnings Profiles(Source: Author’s calculation based on Table 1)4.855.25.45.6MonthlyEarnings(Log)0 10 20 30 40 50Potential Work Experience (years)All FemalesMalesEstimating the Payoff to Schooling using the Standard Mincerian Model -- Losina Purnastuti2190. This occurs when potential workexperience reaches 34.85, 40.80, and 33.48years for all, male, and female samplesrespectively (see Figure 3).Figure 3 uses the estimates from Table 1to predict experience-earnings profiles. Thefigure presents some patterns worth noting.As discussed above, the experience-earningsprofiles have concave, first rising and thenfalling after reaching a given number ofyears. Based on the previous calculation ofthe experience-earnings profile we knowthat the earnings of male workers increasewith experience until their peak at 40.80years. Thus for a male leaving education atage 16, this peak would be at age 57.Female workers reach the peak of theirexperience-earnings profile earlier thantheir male counterparts, at 33.48 years.Thus for females leaving school at age 16this peak would occur at 50 years. Thiswould be well after women with careerinterruptions due to child bearing andrearing have returned to the labour market.ConclusionThis paper reports evidence on thereturns to schooling in Indonesia andhighlights some critical issues. Separateestimates are obtained for males andfemales. OLS is employed as themethodological approach to measure thereturn to schooling. The estimation of thestandard Mincerian earnings functionsrevealed that the return for an extra year ofschooling is positive and significant. Theresults confirm that the returns to schoolingin Indonesia are low in comparison with thereturn to schooling in many other countries,particularly Asian and developing countries.Furthermore, it is clearly shown that thereturns to schooling are higher for femalesthan for males, which is in agreement withthe findings of other studies.References:Aromolaran, A. B. (2006) Estimates ofMincerian Returns to Schooling inNigeria. Oxford Development Studies 34(2): 265-292.Aslam, M., F. Bari, and G. Kingdon. (2010)Returns to Schooling, Ability andCognitive Skills in Pakistan. EducationEconomics,DOI:10.1080/09645292.2010.488470Behrman, J.R., and A.B. Deolalikar (1993)Unobserved Household and CommunityHeterogeneity and the Labor MarketImpact of Schooling: A Case Study forIndonesia. Economic Development andCultural Change 41 (3): 461-488.Brunello, G., S. Comi, and C. Lucifora (2000)The Returns to Education in Italy: A NewLook at the Evidence. IZA DiscussionPaper No. 130.Flanagan, R. J. (1998) Were CommunistsGood Human Capitalist? The Case of theCzech Republic. Labour Economics 5:295-312.Lopez-Avecedo, G. (2001) Evolution ofEarnings and Rates of Returns toEducation in Mexico. Policy ResearchWorking Paper No. 2691.Maurer-Fazio, M., and N. Dinh (2004)Differential Rewards to, andContributions of, Education in UrbanJurnal Economia, Volume 8, Nomor 2, Oktober 2012220China’s Segmented Labor Markets.Pacific Economic Review 9 (3): 173-189.Miller, P., C. Mulvey, and N. Martin (1997)Family Characteristics and the Returns toSchooling: Evidence on GenderDifferences from a Sample of AustralianTwins. Economica 64: 137-154.Mincer, J. (1974) Schooling, Experience andEarnings. NBER, New York.Psacharopoulos, G. (1981) Returns toEducation: An Updated InternationalComparison. Comparative Education 17(3): 321-341.Psacharopoulos, G. (1994) Returns toInvestment in Education: A GlobalUpdate. World Development 22 (9):1325-1343.

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