Panel Paper: The Economic Returns to Schooling In Tanzania: Implications for Recent Changes In the Labor Market

Thursday, November 8, 2012 : 1:15 PM
Hanover B (Radisson Plaza Lord Baltimore Hotel)

*Names in bold indicate Presenter

Frederick Wanjera, Indiana University

This paper estimates the returns to tertiary education and wage inequality using a three period panel of households and provides estimates of the returns to schooling in major urban areas in Tanzania over a period following major economic reforms in that country. The study pays attention to tertiary education, while also treating the endogeneity that is common in these types of estimates. This analysis is particularly warranted, given the importance of education has been underscored recently, through public initiatives that have prioritized education to promote development. Mincerian wage equations (Mincer, 1974) are estimated using random and fixed effects as well as quintile regression techniques. Previous studies on returns to tertiary education in Africa, have been mixed, hence the need for a country specific study (Psacharopoulos, 2001). The study adds to current international literature and is also necessitated by the dearth of research on the economic and social benefits of tertiary education in Tanzania, including a narrow definition of tertiary education, which often excludes non-university institutions. Estimates show that tertiary education is a strong predictor of earnings for both men and women. The returns are significantly higher for men when the analysis is decomposed by gender, however, the returns are much higher for women when the general sample is considered. The quintile regressions show that while the returns declined at the lower end of the wage distribution, they increased at the top level of wage distribution. Results show that education contributed to higher wage inequality through both within and between dimensions. The within-groups inequality increased and between-groups inequality decreased. In constructing a profile of Tanzania’s workers and how education determines income, employment and wellbeing, the study lays down a broad framework on the relationship between human capital and development. Despite a high level of unemployment, which is a major challenge for Tanzania, it appears that the productivity and economic returns to individuals resulting from tertiary education are beneficial, in both the informal and formal sector. The pattern and timing of the changing returns may suggest that they are influenced strongly by institutional reforms in the labor market and the deregulated labor climate created by Tanzania’s embrace of structural adjustment programs in the last decades. These changes may have increased the demand for skilled labor. Further results are provided for the earnings effects due to experience, working for the public sector, geographic region, employer size, industry of employment, sheepskin effects and how all these contribute to earnings and heterogeneity in earnings distribution. Increases in foreign direct investment inflows and embrace of laissez faire economic policies are discussed as contributing factors to the recent rise in returns to education and the earnings gap. While low returns to education are experienced by those operating in the lower end of the informal sector, due to being paid less than their marginal product, they do not necessarily mean that education has no value for this group. I show that for this group, the externalities realized from the social return to education, exceed the estimated private returns.