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The Returns to Education
and Skills Issues:
International Evidence
Harry Anthony Patrinos
December 2015
Human Capital Theory
- -
+++++
+-
Earnings/ productivity
More educated
Age
Less educated
Priors and Stylized Facts
Priors
1. Private returns to schooling are positive
2. Higher in low/middle income economies
3. Returns highest at primary level
4. Estimated returns higher for women
5. Returns declined very modestly over time
Psacharopoulos 1972, 1973, 1985, 1989, 1994; Psacharopoulos and Patrinos 2004, 2015; Banerjee and Duflo 2005; Colclough, Kingdon and Patrinos 2010; Harmon, Oosterbeek and Walker 2003
New Survey
• 131 economies, 545 surveys
• Private Rates of Return
• Multiple uses of returns studies
C. Montenegro; H. Patrinos (2014) “Comparable Estimates of Returns to Schooling Around the World,” World Bank Policy Research Working Paper No. 7020.
Estimates of Returns to Schooling
Full-Method Estimate
- -
- -
- -
+ + + + + +
+ + + + + +
Productivity
$
0 18 22
University graduate
High school graduate
- -
- -
Findings
Average Private Return: 10.4%
0
.05
.1.1
5.2
Den
sity
0 5 10 15 20Rate of return
Montenegro and Patrinos 2014
Highest Returns in Africa
5.6
7
8.2
10
10.3
10.3
12.8
0 2 4 6 8 10 12 14
Middle East/North Africa
South Asia
Eastern/Central Europe
High Income Economies
East Asia/Pacific
Latin America/Caribbean
Sub-Saharan Africa
Returns to Schooling (%) by region (latest available year between 2000-2011)
Montenegro and Patrinos 2014
Primary Returns High in Low Income Countries
0
5
10
15
20
25
World Low Income Lower middleincome
Upper middleincome
High Income
Pri
va
te a
nn
ua
l re
turn
s t
o e
du
cati
on
(%
)
Primary Secondary Tertiary
Montenegro and Patrinos 2014
Returns Highest at Tertiary Level
11
10.1
17.6
8.9
18.4
16.8
15.4
21.9
4.8
8.3
9.3
9.4
9.6
10.3
11
13.4
0 5 10 15 20 25
High Income Economies
Eastern/Central Europe
Latin America/Caribbean
Middle East/North Africa
South Asia
World
East Asia/Pacific
Sub-Saharan Africa
Returns to schooling by region (and World) and by Primary and Tertiary Education
Primary Tertiary
Montenegro and Patrinos 2014
Rate of Return to Schooling
0
4
8
12
16
20
Primary Secondary University
Latest year
Montenegro and Patrinos 2014
Returns Higher for Women
9.6
11.5
8
9
10
11
12
Men Women
Montenegro and Patrinos 2014
Returns Higher for Women
9.8
7
15.2
10.8
8.4
16.7
0
4
8
12
16
20
Primary Secondary Tertiary
Men Women
Montenegro and Patrinos 2014
Returns Decline with Schooling
0
2
4
6
8
10
12
14
16
1980-1985 1986-1990 1991-1995 1996-2000 2001-2005 2006-2010
Returns Years of schooling
Montenegro and Patrinos 2014
Returns Tend to Decrease
Montenegro and Patrinos 2014; Psacharopoulos and Patrinos 2004
High Returns & Lower Schooling
Returns to Schooling Over time
0
2
4
6
8
10
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
EU Countries
Returns to University Education
9
10
11
12
13
Overall Male Female
EU Countries
0.0
5.0
10.0
15.0
20.0
25.0
2000 2002 2004 2006 2008 2010 2012 2014
Returns to Primary
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
2000 2002 2004 2006 2008 2010 2012 2014
Returns to Secondary
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
20.0
2000 2002 2004 2006 2008 2010 2012 2014
Returns to University
Returns to Schooling in EU
0
2
4
6
8
10
12
14
16
2004 2006 2008 2010 2012 2014
Austria
0
2
4
6
8
10
12
14
16
2004 2006 2008 2010 2012 2014
Germany
0
2
4
6
8
10
12
14
16
2002 2004 2006 2008 2010 2012 2014
Greece
0
2
4
6
8
10
12
14
16
2004 2006 2008 2010 2012 2014
UK
Private Returns Properties
Undisputable
Universal, global
Explaining behavior
Analyzing distribution effects
• Example: Student loans
But not sufficient for funding policies
Social Returns for Policy
Narrow social returns
• incorporating direct market effects
Wide social returns
• incorporating external and non-market effects
Social Returns by Level
G. Psacharopoulos; H. Patrinos (2004) “Returns to Investment in Education: A Further Update,” Education Economics 12(2)
26.6
17.0
19.0
0
5
10
15
20
25
30
35
Primary Secondary Higher
Private Returns by Type
0
2
4
6
8
10
12
14
16
18
General Vocational
Social Returns by Type
0
2
4
6
8
10
12
14
16
18
General Vocational
As Economies Develop, Type of
Skills Demanded likely to Change
Levy and Murnane (2005)
40
45
50
55
60
65
70
1960 1970 1980 1990 2002
Nonroutine Manual
Routine
Manual Routine
cognitive
Nonroutine
analytic
Non routine
interactive
Deming 2015
How to Succeed in Labor Market?
Automation is Coming
Eden and Gaggl 2015
Invest Early
Heckman
Need Relevant Skills
1. Problem-solving skills
2. Learning skills
3. Communication skills
4. Personal skills
5. Social skills
That was Then, This is Now
Priors Now
Private returns to schooling are positive
Yes. Private returns to schooling are 10%
Higher in low/middle income economies
Yes. Private returns highest in Africa
Returns highest at primary level
No. Private returns highest at tertiary level
Estimated returns higher for women
Yes. Returns higher for women at all levels
Returns declined very modestly over time
Yes. Despite massive
increases in schooling, returns declined gradually
Psacharopoulos 1972, 1973, 1985, 1989, 1994; Psacharopoulos and Patrinos 2004, 2015; Banerjee
and Duflo 2005; Colclough, Kingdon and Patrinos 2010; Harmon, Oosterbeek and Walker 2003 Montenegro and Patrinos 2014
That was Then, This is Now
Priors Now
Private returns to schooling are positive
Yes. Private returns to schooling are 10%
Higher in low/middle income economies
Yes. Private returns highest in Africa
Returns highest at primary level
No. Private returns highest at tertiary level
Estimated returns higher for women
Yes. Returns higher for women at all levels
Returns declined very modestly over time
Yes. Despite massive
increases in schooling, returns declined gradually
Psacharopoulos 1972, 1973, 1985, 1989, 1994; Psacharopoulos and Patrinos 2004, 2015; Banerjee
and Duflo 2005; Colclough, Kingdon and Patrinos 2010; Harmon, Oosterbeek and Walker 2003 Montenegro and Patrinos 2014
Expand Higher Education
• Based on efficiency and equity
• Don’t pass on the cost to general taxpayer
• Use future earnings to finance current
education
• A more private sector approach might
involve Human Capital Contracts [Lumni;
Upstart]
How to Finance University
• Using future earnings to finance current
education
– or income contingent loans/repayments –
• Solves many of the equity issues in
university finance
Using Future Earnings
Income Contingent Loans
Human Capital Contracts
• Address budget issue
• Create new sources of finance
• Don’t deter students
How They Differ from Conventional Loans
Gra
du
ate
pa
ym
en
ts
Graduate income
Income Contingent Loans
Gra
du
ate
pa
ym
en
ts
Graduate income
How They Differ from Conventional Loans
Or Human Capital Contracts
Gra
du
ate
pa
ym
en
ts
Graduate income
Income Contingent or Human
Capital Loans
How They Differ from Conventional Loans
Equity Issues
• Getting disadvantaged youth to apply
• Returns high on average
• Avg university grad earns 67% more than high
school grad (Oreopoulos and Petronijevic 2013)
• Not worth it to enroll and dropout
There must be better information
Greater support networks to take on challenge
Better Information
• Disadvantaged overestimate (underestimate)
benefits (costs)
• Students from poor families sometimes don’t apply
o even if they have grades; would receive support
• Better information would help
o yet while information on benefits is available – PayScale –
it is not enough
@hpatrinos
Harry Anthony Patrinos Education, World Bank
