Association for Public Policy Analysis & Management

The study analyzes post-secondary education and labor market segmentation in Tanzania using a three year panel of estimates. As a point of departure from past studies, the analysis of labor market experience is decomposed by education levels and by the formal and informal sector. It improves over common measures of wage differentials by taking advantage of the longitudinal nature of the data to control for unobserved heterogeneity and also controls for endogeneity. The study is further motivated by the fact that, even though there is a distinguishable literature on earnings and returns to education in other parts of the world, only a small part of this literature addresses this issue in Africa.  Hence policy interest in an economy that has not been studied closely, should focus not only on the returns to post-secondary education as has normally been the case but on the dispersion in the profitability of post-secondary education across both the informal and formal sector and whether there are differences due to segmentation in the labor market. Developing economies that are characterized by dualism and segmentation may have serious problems meeting their development agenda, given it is a stylized fact that education has almost no benefits within a segmented labor market. Although many studies have been carried out on segmentation and duality, it has not been clearly established how education interacts with segmentation in this particular labor market. More importantly, the characteristics of segmentation and the role of education in ameliorating this problem, across the formal and informal sectors, has not been well articulated in past literature. To calculate labor mobility, transition matrices are used. The results here find that there is high mobility between sectors favoring the move from informal to formal employment. This indicates that there is a general preference for formal employment. More importantly, there is evidence that post-secondary education is associated with higher levels of formal employment.  Interestingly there is evidence of a positive wage premium associated with workers with tertiary training in the informal sector compared to those with no such qualification in that sector.  Not surprisingly, an interesting finding is that there is evidence of low mobility of workers between self-employment and formal sector jobs. Another significant finding is that there are stark contrasts in earnings due to different skill levels and levels of education with workers with higher levels of education, including those with post-secondary schooling, commanding the highest earnings of all groups.  This analysis finds evidence of segmentation between formal and informal employment which is demonstrated by higher mobility informal to formal employment. Wages are higher in the formal sector compared to the informal sector. The larger wages in the formal sector may be due the higher cost of entering the sector. Finally, this analysis also finds variations in wage differences across education levels. This indicates that wages may be partly contributing to the segmentation in this market.  Post-secondary education appears to be important for entry into formal employment while the same cannot be said of the informal sector.