Returns to Education in Developing Countries

In developing countries, it is generally believed that a good health status and education (human capital) bring economic well-being and benefits. Some researchers have found that there are overall financial returns and income premiums correlated with human capital because of its excellent and higher ability. Due to different views and a lack of consensus, the role of human capital is still ambiguous and poorly understood. This study investigates the economic returns of health status, education level, and social interaction, that is, whether and how human capital and social interaction affect employment and income premiums. Using the Chinese General Social Survey (CGSS) for specification bias, we used the instrumental variable (IV) approach to specify the endogeneity and interaction effect in order to identify the impact and economic returns of human capital and social interaction on the values of other control and observed variables. However, we show that an individual with strong and higher human capital positively affects economic returns, but the variability of these estimates differs across estimators. Being more socially interactive is regarded as a type of social interaction but as not human capital in the labor market; thus, the empirical findings of this study reflect social stability and that the economic well-being of socially active individuals is an advantaged situation. Furthermore, men with substantial human capital and social interaction are in a more advantaged position compared to women with similar abilities.

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Health, Education, and Economic Well-Being in China: How Do Human Capital and Social Interaction Influence Economic Returns

Strong empirical links exist between the number of years spent schooling and earnings. How­ever, the relationship may be masked due to the effect of unobserved factors that influence both wages and schooling. Two of the main econometric models, namely fixed-effects and se­lection-effects, used to analyse returns to schooling were compared using monozygotic and di­zygotic twins’ datasets in Ghana. The efficiency of the models was assessed based on the stan­dard errors associated with the return to schooling estimates. Goodness of fit measures was used as a basis for comparison of the performance of the two models. The results revealed that based on their standard errors, the regression estimates from the selection effects model (MZ = 0.1014±0.0197; DZ = 0.0947±0.0095) were more efficient than the regression estimates from the fixed-effects model (MZ = 0.1115±0.0353; DZ = 0.082±0.0127). However, the AICc values of the fixed effects model (MZAICc = 57.8 and DZAICc = 105.4) were smaller than the AICc values of the selection effects model (MZAICc = 151.6 and DZAICc = 221.6). Findings from the study indicate that, although both models produced consistent estimates of the economic returns to schooling, the fixed effects model provided a better fit to the twins’ data set.

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A. Agyeman

Papers

Estimating the Returns to Schooling: A Comparison of Fixed Effects and Selection Effects Models for Twins