Which Education Pays?

: Accounting for Quality and Ability in Returns to Education in the Philippines

Michael Cabalfin Economics PhD Candidate Arndt-Corden Department of Economics

Overview
I. Introduction
A. Significance B. Hypotheses C. Contribution

II. III. IV. V.

Literature Review Model, Methods & Data Results Summary & Conclusions

Low growth in 1980s-1990s due to low human capital. Higher growth in 2000s due to higher and increasing human capital.
GDP per capita growth (annual %), 1961-2011
8 6 4 2 0 1961 1964 1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 -2 -4 2009

1970s: Debt-Driven Growth Low growth in 1980s-1990s (Balisacan & Hill, 2003)
Political crisis in mid-1980s Natural disaster in 1991 Asian Financial Crisis in 1997-98 low saving and investment rates slow employment growth eroding comparative advantage in and quality of education (Herrin & Pernia, 2003)

-6
-8 -10 -12 Actual Trend

Higher growth in 2000s:

despite declining investment; driven by services & consumption (Bocchi, 2008) Growth in services associated with higher returns to education (di Gropello, Tan, & Tandon, 2010)

Sufficient returns to primary education until the 1990s: low human capital. Increasing returns to higher education in the 2000s: higher human capital
Educational Attainment (% of pop. Aged 15 & over)
100.0 90.0 80.0 70.0 Complete Secondary 60.0 Incomplete Tertiary Complete Tertiary

50.0
40.0

Incomplete Secondary Complete Primary

30.0 20.0 10.0 No schooling 0.0 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

Incomplete Primary

Agriculture shrunk after hitting land frontier, Industry slightly shrunk due to low investment, Services grew due to human capital
Sectoral Value Added (% of GDP)
100 90 80 70 60 Services

50
40 30 20 10 0 19601962196419661968197019721974197619781980198219841986198819901992199419961998200020022004200620082010

Industry Agriculture

Agricultural employment shrunk, industrial employment decreased slightly, service employment grew
Sectoral Employment (% of total employment)
100 90

80
70 60 50 40 30 20 10 0 Services Industry Agriculture

Returns to education in - agriculture low and declining, services and industry higher and increasing
Average Product of Labor (constant 2000 US$)
9000 8000 7000 6000 5000 4000 3000 2000 Total Labor Agriculture Industry Services

1000
0

Hypotheses
1. Increasing returns to education in the 2000s 2. Low returns to education in agriculture; higher returns to education in industry and services 3. Returns to education across regions vary with income per capita 4. Education quality & ability affects returns to education 5. Returns to education and ability vary for overseas workers, by sex, across occupations, classes of work

Contribution
New estimates of returns to education in the Philippines, accounting for:
changes over time quality of education
using test scores for primary and secondary education

observed differences
by overseas employment, sex, across regions, industries, occupation, class of work

unobserved differences in ability

using sibling fixed-effects estimation

Returns to schooling
Human Capital Earnings Function (Mincer, 1974) :
= 0 + + 1 2 2

Diminishing returns to income: 10.9% in low-income, 7.4% in high income countries (Psacharopoulos, 1993; Psacharopoulos & Patrinos, 2002) High returns to schooling in the Philippines in the 1980s-1990s
11.9 percent in 1988 (Hossain and Psacharopoulos, 1994) 14 percent in 1995 (Gerochi, 2002)

Comparable to those for some neighboring countries

12.4 percent in Thailand, 13.5 percent in South Korea in 1986, and 13.1 percent in Singapore in 1998.

omitted-variable bias: does not account for differences by sex, across regions, industries, etc.

Returns by education
Extended earnings function: = + 1 + 2 + 3 + 1 + 2 2 + Non-linear sheepskin effect discontinuities at completion (Hungerford & Solon, 1987) Highest rate of return for primary education across regions (Psacharopoulos, 1993; Psacharopoulos & Patrinos; 2002) Highest returns to primary education in the Philippines in the 1980s-90s
18.6% in 1988 against 10.2 for secondary and 11.0 for tertiary education (Hossain & Psacharopoulos (1994) 24% in 1995 against 14.3% for secondary and 15.8% for tertiary education (Gerochi, 2002)

Correspondingly high social returns to primary education prioritizing primary education (Hossain & Psacharopoulus, 1994) Assumption: no foregone incomes below age ten

Returns by education
Increasing returns to education in the Philippines from the late 1990s
9.4% for primary, 10% for secondary, 16.7% for tertiary in 1998 (Schady, 2000) 6-8% for primary, 5-10% for secondary, 16-18% for tertiary between 1988 and 2006 (di Gropello, Tan, Tandon, 2010) 2% for primary, 7.3% for secondary, 15.3% for tertiary for 2003-2007 (Luo & Terada, 2009)

due to globalization and skill-biased technological change (di Gropello, Tan, & Tandon, 2010). accrues mostly to the service sector (ADB, 2007)

Issues
1. Omitted ability upward bias (Griliches, 1977)
Ability positively related to schooling and wages return to education = human capital component + signaling component (Spence, 1973) education does not add to productivity but acts as a screening device (Arrow, 1973)

2. 3.

Returns to education biased & inconsistent

Endogeneity of schooling Quality of education

quality, more than the quantity of education, affects incomes and growth (Hanushek & Woessman, 2007) Inputs: pupils per teacher, teacher salaries (Card and Krueger, 1992) Outcomes: Young American males: 30% increase in earnings per 1SD increase in math scores (Murnane, Willett, Duhaldborde, & Tyler, 2000)

Strategies
1. Control for observed ability (e.g. IQ, other test scores)
NLSY: ability accounts for only 0.3-0.9% in returns of 6.8% (Griliches (1977) In 13 OECD countries, as literacy scores rose by 1 SD, annual earnings rose by 24% in the US, and by 5-15% in the other countries (Hanushek & Zhang, 2006)

2.

Instrumental variable:
Quarter of birth (Angrist & Krueger, 1991); school proximity (Card, 1993); parents education (Card ,1999) Phils: distance to schools, father's and mother's education, own farmland return to education rises from 7.3 to 12.6% (Maluccio, 1998)

3.

Family fixed-effects
US: 25% for brothers, 30% for father-son (Ashenfelter & Zimmerman, 1997); 30% for twins (Ashenfelter & Rouse, 1998) South Africa: 80.5% for husband-wife, 70.6% for parent-child, and 63.2% for siblings (Hertz, 2003)

Econometric Model
1.
2 () = + 0 + 1 + 1 + 2 + 1 , + 2 , , + +

= return per year of schooling + = return to quality for test cohort; = return for community = unobserved individual effect

2.

() = + 0 + 1 + + 2 1 + 2 +
: Education level, Male, 18 Regions, 14 Sectors, 9 Occupations, Class, Year

= return per year of schooling (for reference group)

+ = return to schooling for category K

Methods
1.
2.
ln() = + + : unobserved individual effect Pooled OLS: = , identical across individuals

ln() = + +

Fixed-Effects estimation: , vary by individual

Individual: , = ,1 , constant over time
ln

a. b.

ln

ln

Sibling: 1 2 , identical between siblings

1

1 2

= , ,1 + 1 +

ln

3. 4.

Random-Effects estimation: = ( + ), part of random error

ln() = + ( + )

= 1 2 + 1 2 +

Hausman specification test

Data
July round of quarterly Labor Force Survey
41K households 200K individuals per round No unique HH ID for 2001-2006 No provincial and municipal variables for 2007-2010

Trend: 2001-2010 LFS Full sample - >2M individuals

Quality: Custom 2003-2010 LFS Quarter sample - <346K individuals
Includes provincial and municipal variables needed to merge with Education Quality data

Fixed-effects: 2007-10 Full sample

Extract 2 eldest siblings by household: 200K+ individuals

Education Quality
National Elementary Achievement Test (NEAT) - 1993-2000
English, Filipino, Science, HEKASI (Geography, History and Arts) and Mathematics

National Secondary Achievement Test (NSAT) - 1997-1999

English, Filipino, Science, Mathematics and Social Studies

merged at the provincial and city levels: 98 provinces & 49 cities = 147 divisions

Returns to schooling rose over time

Returns to Schooling by Year
13.5%

13.0%

12.5%

12.0%
w/ Year FE

11.5%

No Year FE

11.0%

10.5%

10.0% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Quality of Primary Education affects earnings

Returns to Quantity and Quality (Primary) of Education
60% Std.Dev. increase in Wages per 1 Std.Dev. Increase in Schooling/Quality

50%

40%

30%

20%

10%

0% No Quality Overall Quality Return to Schooling Math Science English Geography, History, & Arts Filipino

Return to Quality - Cohort

Return to Quality - Community

Quality of Secondary Education affects earnings more

Returns to Quantity and Quality (Secondary) of Education
60% Std.Dev. increase in Wages per 1 Std.Dev. Increase in Schooling/Quality 50%

40%

30%

20%

10%

0% No Quality Overall Quality Return to Schooling Math Science English Filipino Vocational Social Studies Return to Quality - Cohort Return to Quality - Community

Increasing returns to education, and to education quality

Returns to Education with Quality
30% 25%

20%

15%

w/o Quality w/ Primary Quality w/ Secondary Quality

10%

5%

0% Incomplete Elementary Elementary Graduate Incomplete Secondary High School Graduate Incomplete College College Graduate Post-graduate

Selection bias not much of a problem

12.0%
10.0%

8.0%

6.0%

OLS

Heckman

4.0%

2.0%

Controls: experience, experience squared, education quality, sex, urbanity, year Instruments: age, members less than age 15 Selection bias at 10% significance level w/ Primary Quality

0.0% w/ Primary Quality w/ Secondary Quality

Accounting for sibling fixed-effects reduces returns to education by 70%

Returns to Schooling
14% 12%

10%

8%

OLS RE

6%

FE

4%

2%

0%

No significant returns to basic education, higher education pays; ability rises with education
25%

20%

0.156*** 15%

0.160***

FE 10% 0.065*** 5%

Ability

0.019
0.004 0% Incomplete Primary Complete Primary

0.017

0.018*

Incomplete Secondary

Complete Secondary

Incomplete College Complete College

Post-Graduate

Female returns to education are higher but male wages remain higher
4
3.5

3 Log(Wage)

2.5

All Males Females

1.5

1 0 2 4 6 8 Years of Schooling 10 12 14 16

Higher returns to education for overseas contract workers, higher returns to ability for back-door overseas workers
Returns to Education among Overseas Workers
30% 25% 20% 15% 10% 5% 0% -5% -10% -15% -20% FE Ability 100 90 80 70 60 50

Education by Overseas Worker Status

Complete Master/PhD

Complete College
Incomplete College Complete Secondary Incomplete Secondary Complete Elementary Incomplete Elementary No Schooling

40
30 20 10 0

Richer regions tend to have higher returns to education; poorer regions rely more on ability
Returns to Education by Region
10% 9% 8% 7% 6% 45 40 35 30 GRDP per capita (Thousand Pesos)

25
5% 20 4% 3% 2% 1% 0% 15 10 5 0

FE Ability GDPpc

High ROE in half of Services, low ROE in other half complemented by higher ROA; same trend in Industry; low ROE and ROA in Agriculture
Returns to Schooling by Industry
14% 12% 10% 8% 6% 4% 2% 0% -2% -4% FE Ability

Most occupations with high returns to education have lower returns to ability; low ROE occupations compensate with higher returns to ability
Returns to Schooling by Occupation
14% 12% 10% 8% 6% 4% 2% 0% -2% -4% Officials of Special Government Occupation and SpecialInt Clerks Service Technicians Professionals Farmers, Trades and Plant and Laborers and Workers and and Forestry Related machine Unskilled Shop and Associate Workers and Workers Operators Workers Market Sal Professionals Fishermen and Assembl

FE Ability

Government work has high return to education; private work has low returns to education but higher returns to ability
Returns to Schooling by Class of Work
9% 8% 7% 6% 5% FE 4% 3% 2% 1% 0% Gov't/Gov't Corporation Private Establishment Private Household With pay (Family owned Business) Ability

Summary & Conclusions

1. Increasing returns over time consistent with increasing human capital 2. Quality of education just as / may be more important than quantity 3. Education quality improves welfare of cohort and has external benefit to community 4. Increasing returns to education quality 5. Selection bias not much of a problem 6. Ability accounts for 70% of standard estimates of returns to education 7. No significant returns to basic education, higher education pays; ability rises with education except at college completion

Summary & Conclusions

8.

9.
10. 11. 12. 13.

Higher returns for females close the wage gap with college completion Higher returns to education for overseas contract workers, higher returns to ability for back-door overseas workers Richer regions tend to have higher returns to education; poorer regions rely more on ability Education returns vary across industries and services; low education returns complemented by high returns to ability in. Low returns to education & ability in agriculture. Occupations with high education returns generally have returns to ability; those with low education returns compensate with higher ability Government work has High return to education, private work has low returns to education but high returns to ability

Thank you!
Salamat!