Returns To Education (Angrist&Kruger Duflo, DDK)

Question 1

Mincerian returns to education expression

Answer 1

Log incomei = a + b(years educationi) + c(experiencei) + εi

I.e an extra year of education raises income by b%

Question 2

What do we find the return to education to be?

Answer 2

b=8-12% i.e 8-12% increase in income per year of education

Question 3

Econometric concerns with this regression (2)

Answer 3

Omitted variable bias - omits other factors influencing income e.g motivation, ability etc

Measurement error - quality/learning Varys by country, school, teacher etc

Data may also be unreliable in low income countries

Question 4

Rich country schooling: when do children enter school, and compulsory till?

Answer 4

Enter school in year they turn 6.

Compulsory till 16

Question 5

Angrist and Krueger

Answer 5

Compared adult income of those born in first and last quarter.

Since those born in 1st quarter get 6 months less compulsory schooling than those in last quarter!

Then to account for people to drop out at 16, scale up the income difference

Question 6

What did they find for return to schooling

Answer 6

Return to an additional year of schooling is 10% (complies with Mincerian estimate of 8-12%)

Question 7

What is important to note about this result tho

Answer 7

Returns may be different compared to average person e.g smaller if they dont get much out of school anyways so a lot dropped out of school when they could (hit 16)

I.e only shows variation for people dropping out vs staying,

Question 8

Why is measuring returns to education in developing countries difficult (3)

Answer 8

Most are not in formal sector - e.g self employed like farmers with no official/regular wage, informal sector

Wages may not reflect productivity e.g government salaries

Hard to measure social externalities too

Question 9

So what is the best way to find returns to education in developed countries

Answer 9

Use surveys asking how much people earn

Question 10

Duflo experiment

Answer 10

If school construction can increase average years of schooling.

(Reducing direct cost r of getting to nearest school, since more around and closer!)

Question 11

Effect of 61807 new schools built 1973-79

Answer 11

Enrolment from 69% 1973 to 83% in 1978
(They built more schools in places with lower enrolment)

Question 12

Research design in Duflo - 3 categories

Answer 12

Differences in differences

Looked at:
Children younger than 6 at program start - full exposure (get full primary school benefits)
Children older than 12 at program start - not exposed at all (since finished primary school)
Exposure between targeted vs non-targeted areas

Question 13

Difference in difference equation

Answer 13

ΔDiD = (y target region old - y target region young) - (y other region old - y other region young)

To cancel out region and cohort invariant differences (because olders will obviously earn more, and target regions are poorer orginally)

Question 14

Findings (DiD figure)

Answer 14

2.6% higher wage for DID

Question 15

What did Duflo find returns to education to be

And criticism/evaluation

Answer 15

10.4% (similar to Angruist and Kruher, again supporting Mincerian returns)

Eval: from a sample of wage earners (61k/153k total), so doesnt include non-formal wage earners. (Problem mentioned earlier when looking at developing countries)

Question 16

So a criticism of the results is that the sample only uses formal wage earners:

When considering self employed as well, what are returns to education?

Answer 16

3.2%.

Question 17

Another evaluation of Duflos experiment to consider

Answer 17

Done in Indonesia, experiencing fast growth at the time. Same results may not occur in other developing countries

So sample size small (10.4% formal, 3.6 for self earners), and rapid growth in Indonesia! (Generalisability)

Question 18

What happened to student/teacher ratio during this program, what did this affect

Answer 18

While number of schools increased by 100%, teachers by 43%.

So class sizes increase, so potentially reducing quality of education

Question 19

General equilibrium concerns:

We saw 2.6% increase in wage from DID. why might wage not actually increase following education?

Answer 19

Newly educated cohort can just displace older cohorts if finite amount of jobs. especially countries with mostly fixed government salaries

Supply of labour increases so wages may fall as a result of the higher educated workforce.

Question 20

So that was primary education. Now consider secondary school returns

Question 21

Reasons against pushing universal secondary education (3)

Answer 21

Over-educated - given limited number of skilled jobs (mentioned last slide)

Overcrowd schooling and lower quality - recall student/staff ratios rising in Duflo

Subsidises rich - who no longer have to pay to send kids to school

Question 22

Experiment for secondary education: Duflo, Dupas & Kremer

Explain process

Answer 22

Gave scholarships to 682 people who passed entrance but couldnt afford enrolment immediately.

Follow up at age 28 (entry: 17 so long term!!)

Question 23

Results of the scholarship
Enrolment and completion, and average years of schooling

Answer 23

Those who couldnt enrol immediately and got no scholarship - 50% ended up enrolling anyways
For those who couldnt enrol immediately but got given scholarship, 75% went (so 25% increase)

Completion of school increased by 27% too.

Scholarships achieved 1.2 more years of schooling

Question 24

Was it cost effective?

Answer 24

So 50% enrol given no scholarship, and 75% if given scholarship.

So for 4 students, 2 will enrol, and 1 will enroll given a scholarship. So paying for 3 gets one extra, so not so cost effective!! (since 50% go anyways!)

Extra: if we offered scholarships to everyone: it would increase to paying for 15 people would create 1 more enrolment

Question 25

Results (in terms of education)

Answer 25

Better maths, literacy and less risky sexual behaviour

Question 26

Labour market results following scholarship (3)

Answer 26

Girls now 65% more likely to get a government job

More likely to have formal contract

No significant increase in earnings!!! (Links back to limited jobs, or increase in supply lowering wage!)

Question 27

Why no increase in earnings? (2) (1 is new)

Answer 27

Over-education - increased competition for these limited formal sector jobs

More education means less experience, so lower wages first, so wait even longer (past the 10year experiment!)

Question 28

So from these findings we have seen b (return to education) is around 10% for each additional year of primary school (not secondary as seen)

So a low return b doesn’t seem to be the problem! What is?

Answer 28

If parents are aware of the b (PERCEIVED VS TRUE!!)