Microeconometric Analysis of Private Returns to Education and Determinants of Earnings


Abstract. This paper attempts to identify the key determinants of earnings of the employees in institutions of general education in Lahore District (Pakistan). A sample of 3358 teaching and non-teaching employees of institutions (universities, colleges, schools) has been gathered in 2009 through a questionnaire technique. The main objective of this research work was to explore the major factors that affect individual’s earnings and to estimate the private financial returns to education by different levels of education. The factors that positively and significantly contributed to earnings of all, university, college and school respondents were respondent’s education, age, experience, occupation, gender, working hours, spouse education, family background and family status. The results of this study reveal that private financial returns to education vary with the level of education.

The private financial returns to education for college level respondents have been found to be the highest (9.1%) among all levels of education. The positive contribution of computer literacy in case of University respondents has been found to be highest (15.3%) among all. The occupation (teaching vs non-teaching) earning differentials were found to be highest at University level of education. Teaching staff (irrespective of gender) has been found earning more than non-teaching staff at all levels of education. The gender earning differential gap found to be highest at school level. Those university respondents, who have passed matriculation examination (SSC) from private educational institutes, earn 8.7% more than those who have qualified SSC from government educational institutes.

On the basis of findings of this study, it is recommended that such rational development programs and policies should be initiated that minimizes the staff earnings differentials that arise due to occupation (teaching vs non-teaching) and gender (male vs female) basis.


Education, being the starting point of each and every human activity, is considered to be key factor in the development of human capital. It raises notonly labour productivity and efficiency of workforce but also produces a highly skilled manpower that leads the economy towards sustainable economic growth and hence economic development. Education, training and skills are the main levers for acquiring human capital. Education ensures the acquisition of knowledge and skills which enable the individuals to increase productivity. This increase in productivity guarantees new sources of earnings resulting enhancement in economic growth (Saxton, 2000).

Endogenous growth theories (e.g. Lucas, 1988) and augmented Solow growth theories (e.g. Mankiw, Romer and Weil, 1992) have stressed the importance of education in determining sustainable economic growth. Some nations have more income and wealth than other’s nation. Education proved itself to be the main source of this across nation variation in income and wealth. The role of education and hence human capital in determining individual earnings and economic growth is widely accepted but how much economic growth can be raised by expanding only education has not yet been settled. Psacharopoulos (1994) noted that the relative significance of human capital (acquired knowledge and skill) was higher in developing countries relative to developed countries. The rates of return to education for developing countries are higher than those for advanced countries (Psacharopoulos, 1994, 1989, 1981).

Returns to education are the reward of investing in education. This reward can be in the form of earnings and other social returns like honor, status, accommodating attitude, etc. Blundell, Dearden, Goodman and Reed (2000) have classified returns to investments in higher education into three main categories:

Private financial returns to education — acquiring education improves the earnings and/or employment prospects of individuals.

Private non-financial returns to education — it includes improve- ments in individual’s welfare that are not a part of measured earnings (e.g., easy access to highly paid jobs, better working environment and so on).

Social returns to education — acquiring education may have a benefit to other individuals of the society. It is over and above private returns to education. It would occur in the form of positive externalities of the education.

Variation in wages, salaries and earnings and other facilities among people is still a complex and controversial subject. Education level and its standard are the main causes of this variation. Global transfer of technology

one of the most powerful instruments of reducing poverty, inequality, unemployment and other social evils and thus lays foundation for sustainable economic growth and development.

Returns to education generally vary with kind and/or level of education. Empirical analysis of returns to education has shown mixed results. Psacharopoulos (1994) summarized the patterns of rates of return to education prevailing throughout the world as:

The rate of returns to education diminishes with the levels of education, i.e. primary schooling has more returns than those of secondary schooling and the secondary education gives more returns than even higher education.

The returns to education are higher in the private sector than that of public sector. The difference is the outcome of the productivity enhancement role of education in the private sector and fixed and rigid pay structure in the public sector.

The pattern of returns to education remains almost stable as far the developed countries are considered.

Female’s private returns to education are higher than their male counterparts.

The rates of return to education in developing countries are higher than those in developed countries.

The relationship between education and earnings has always been very strong. Education supports significantly differential role in one’s earnings. Studies on education and earnings in several countries support a positive relationship between the two. The positive and significant impact of education on earnings is considered to encourage the younger to continue their studies beyond the compulsory level of education. More educated workers get, on average, more returns than their less educated counterparts because they can perform a wider range of tasks and they can easily be trained in new skills. Educated workers get higher wages, more respect and dignity, stable and sustained employment and higher horizontal and vertical mobility.

So education — a measure of human capital accumulation — plays an important role in one’s wages and earnings differentials. Gindling (1991), Terrell (1993), and Kruger and Summers (1988) have rigorously analyzed the wage differentials between private and public sectors in the industrial world and found dispersion in wages across the industries and sectors substantial.

Besides education, there are many other factors such as age, experience, occupation, gender, working hours, respondent’s sector of matriculation examination (SSC) institution, computer knowledge, and other family and household characteristics that determine individual’s earnings. Age may be a variable for determining the individual’s earnings. Usually wage increases with the increase in age, but in some cases this may reverse. Gender is also another determinant of earnings. Males have advantage over females in job market in developing countries. Women are paid less than men (Siphambe, 2000). Hussain and Awan (2007) quantified return to education in Pakistan and found that male earned more than their female counterparts. Marital status also affects the rate of returns. Married individuals tend to earn more than the unmarried fellows (Green, 2003). Khan and Irfan (1985) found a significant and positive relationship between the individual’s family background and his earnings in case of Pakistan.

Pakistan being a developing country needs rapid expansion in its educational facilities to boost economic growth to be at par with the prosperous nations of the world. This responsibility lies on the shoulders of educationists, economists, and other decision makers of the nation. Though Pakistan’s education sector has rapidly expanded and upgraded in the last two decades yet research conducted in education sector of Pakistan has not been utilized policy formulation. Major proportions of educational institutions have been running and administrating at various levels of Government of Pakistan since 1973. Private, semi public and autonomous institutions still do not constitute a big portion of education sector. In public sector, minimum academic requirements for the post of various cadres are fixed and pay scales are rigid.

At the end of every year, annual increments in the form of an increase in salary are automatically given without any improvement in qualifications and productivities (Chisti, Hasan and Rasheed, 1998).

The slow and steady growth of knowledge of each kind and level has always been a severe restraint to economic progress and prosperity of Pakistan. In spite of a considerable rise in educational institutions and enrollment in the decades of 1980s and 1990s, Pakistan’s labour market is still deficient in educated and skilled manpower. This may be the result of mismatch between education attained and demand suitability for the graduates in the job market. It leads to many social and economic problems including unemployment and low earning profiles both at micro and macro levels.

In the light of above scenario, it is high time that the role of education and other determinants of earnings for the economic benefits of individuals and society be analyzed and explored. their education has been an important subject for educationists, economists, and other policy researchers. There are a variety of factors including traditional and non-traditional and educational and non-educational that play a decisive role in determining the earnings of...

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