Return to Education in Pakistan: A Brief Overview

Abstract

The rate of return to education is a measure of the economic benefits of education in terms of increased earnings and productivity. To provide evidence on the rate of return for Pakistan, we conducted an extensive literature search using online sources such as Google Scholar, JSOR, and others. We also presented global evidence, for comparison on the rate of returns covered extensively in the literature surveys of Montenegro and Patrinos (2023) Patrinos and Psacharopoulos (2020). There are two main estimation frameworks to estimate the rate of returns; the earning function and the full discounting method. The survey of earning differentials in Pakistan reveals several key insights. The rate of return to education varies, but overall, investing in education yields higher returns for females compared to males. However, the average returns for males are relatively low in Pakistan compared to global averages. Across economies, the returns are generally higher for females, and high-income economies exhibit the smallest gender gap. While private returns in Pakistan exceed social returns at higher education levels, a significant proportion of children end up with only primary education, leading to lower productivity and hindering long-term economic growth.

Introduction

The difference in earnings based on the level of education signifies the monetary gains or the incentive to invest in education. It indicates an equilibrium point where demand and supply for skilled labor intersect in the labor market. Moreover, variations in relative earnings between countries highlight the significance of various factors such as minimum wage regulations, skill demand in the labor market, the availability of labor with different educational levels, years of experience, collective bargaining agreements, and the influence of labor unions. Additionally, the distribution of the workforce across various professions and the proportion of part-time/casual and seasonal employment are also important factors to consider (OECD, 2017; Patrinos & Psacharopoulos, 2020). For instance, factors that have been accounted for in Pakistan include relative earnings of employees of different sectors of the economy (Haque 1992; Abbas and Foreman-Peck 2007), by type of enterprises (Hyder 2007).

The literature on earning differentials by level of education has also been explored from important social perspectives including,  studies on racial and ethnic biases (McNabb and Psacharopoulos, 1981; Chiswick, 1988; Psacharopoulos and Patrinos,

1994), gender disparities (Goldin and Polachek, 1987), income distribution, (Mincer, 1958). Under assumptions, variations in earnings by educational level have been used to pinpoint drivers of economic advancement. However, the notable application of educational earnings data lies in estimating the rate of return to investment in education (Patrinos and Psacharopoulos, 2020).

Methodologically, the association between earnings and education has been extensively researched in the literature. Most importantly, the causal impact of education on earnings has remained the prime focus. For instance, a person with a graduate degree earns more than a person without such a degree may not imply that a graduate degree causes a wage differential. Instead, the person who had a graduate degree might have certain unique characteristics that might make him more productive and in return paid more in the labor market. One such factor can be innate ability; higher-ability people might be more able to go to university and be more productive. So, the causal impact of education on earnings cannot be isolated in the absence of data on the innate ability of the people. To avoid such difficulties researchers usually compare people who are as similar as possible but only differ in the level of education.  Many factors are controlled for in such comparison to isolate the causal impact, such as age, gender, race, school quality, and experience. Family background, measured through parental education, being an important variable is also controlled for. Innate ability measured through IQ or aptitude tests is also factored in the comparison. To account for these many different factors, distinct estimation approaches have been utilized with the conclusion that more education is associated with better earnings (Kolesnikova, 2010).

In what follows, the study is organized into different Sections. Section 2 elaborates on the estimation procedure of the rate of return to education, Section 3 presents evidence on private returns to education in Pakistan, Section 4 reports global evidence and section 5 shows evidence on the comparison of private rate of returns to social returns. Section 6 discusses the use of returns in public policy and the research gaps. Whereas, Section 7 concludes with key findings.