Pakistan Institute of Development Economics



Sheepskin Effects in the Returns to Education in a DevelopingCountry

This paper tests for the sheepskin or diploma effects in therates of return to education in a developing country, Pakistan;presumably the only study for me country that explicitly investigatesthis important question. One reason forthis paucity of work may havebeen lack of appropriate data on an individual’s educational status. TheMincerian log -linear specification of the earnings function isgeneralized to allow for the possibility that the returns to educationincrease discontinuously for the ~ears when diplomas/degrees areawarded. This provision is made in three different ways, i.e., by (a)introducing dummy variables for diploma years, (b) by specifying adisoontinuous spline function, and (c) by specifying a step function.Empirical evidence based on a nationally representative sample of maleearners shows that substantial and statistically significant sheepskineffects exist at four important certification levels in Pakistan,namely, Matric, Intennediate, Bachelor’s, and Master’s. This froding isconsistent with the screening rather than the convential human capitalview of the role of education. However, it should be noted that whilediplomas seem to matter, it is not true that only diplomas maUer; sinceeven after controlling for diploma years the schooling coefficient,albeit smaller than before, is still substantial. Again, regarding thediploma effects, another interesting froding is that such effects arenot significant in case of the Primary and the Middle levels ofschooling. In tenns of the policy implications, it follows that, in thecase of Pakistan, education is an important and significant influence onthe individual earnings. However, to the extent that the diploma effectsare significant, the potential for education as a source of enhancingworker productivity is lessened, thus reducing the scope of an activistpublic policy in this regard. This is particularly true for theSecondary levels of education. In fact, the frodings suppon areallocation of the available public funds away from the teniary/highereducation and towards the basic education, where the productivityenhancing human capital effects are relatively more apparent.

Tayybb Shabbir

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