Transition to Financial Independence of the Youth in Asian countries:

is there a pay-off to extended education?

Nicole Mun Sim LaiMonash University Sunway Campus

As the number of college students in Asia has risen twelve-fold, from 3.9 million in 1970 to 46.7 million in 2007, it appears that college education, once viewed as a luxury, may now be a necessity if one wishes to have high earnings (UNESCO 2009).

3

Human Capital Spending Around the World

Taiw

an, 2

003

Sweden, 2

003

Japan

, 2004

Slove

nia, 2004

France

, 2001

Hungary,

2005

South Korea,

2000

US, 2003

Austria,

2000

Mexico, 2

004

Finlan

d, 2004

Thail

and, 2

004

Chile, 1

997

Costa Rica

, 2004

Uruguay

, 1994

Philippines, 1

999

China, 2002

Indonesia, 2

005

India, 1999

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

Public Private

hu

man

cap

ital

sp

end

ing

per

ch

ild

/ave

rage

lab

or i

nco

me

aged

30-

49

Source: Lee and Mason (2009)

Private

Public

Public education plays a larger role in Europe ,

USA & some Latin America

4

Taiw

an, 2

003

Sweden, 2

003

Japan

, 2004

Slove

nia, 2004

France

, 2001

Hungary,

2005

South Korea,

2000

US, 2003

Austria,

2000

Mexico, 2

004

Finlan

d, 2004

Thail

and, 2

004

Chile, 1

997

Costa Rica

, 2004

Uruguay

, 1994

Philippines, 1

999

China, 2002

Indonesia, 2

005

India, 1999

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

PublicPrivate

hu

man

cap

ital

sp

end

ing

per

ch

ild

/ave

rage

lab

or i

nco

me

aged

30-

49

Source: Lee and Mason (2009)

Private

Public

Private education is more important in Asia

Human Capital Spending Around the World

The high education investment may delay individuals from joining the workforce and ultimately increase the economic dependency (economic lifecycle deficits) of the young

When do the young produce more than they consume?

Does furthering one’s higher education pay?

Method

National Transfer Accounts www.ntaccounts.org

Comprehensive estimates on consumption, production, transfers and asset reallocations by age structure

Provides research opportunities to examine the economic allocations over the lifecycle and assess the associated policy implications

-2.22044604925031E-16

0.2

0.4

0.6

0.8

1

1.2

1.4R

elat

ive

to m

ean

labo

r inc

ome

30-4

9

Age

Private Consumption

Mean Private Consumption & Mean Labor Income

-0.2

-1.66533453693773E-16

0.2

0.4

0.6

0.8

1

1.2

1.4R

elat

ive

to m

ean

labo

r inc

ome

30-4

9

Age

Labor Income

Private Consumption

Mean Private Consumption & Mean Labor Income

Financial IndependenceYL>PC

-0.2

-1.66533453693773E-16

0.2

0.4

0.6

0.8

1

1.2

1.4R

elat

ive

to m

ean

labo

r inc

ome

30-4

9

Age

Labor Income

Private Consumption

Mean Total Consumption & Mean Labor Income

Adding Public Consumption

Total Consumption

-2.22044604925031E-16

0.2

0.4

0.6

0.8

1

1.2

1.4

-0.2

-1.66533453693773E-16

0.2

0.4

0.6

0.8

1

1.2

1.4R

elat

ive

to m

ean

labo

r inc

ome

30-4

9

Age

Labor Income

Mean Private Consumption & Mean Labor Income

Total Consumption

-2.22044604925031E-16

0.2

0.4

0.6

0.8

1

1.2

1.4

Full Economic Self-SufficiencyYL>TC

Factors Affecting the Timing

• labor income • capital income • saving rates • college enrollment size • short-term economic fluctuations • public policy • support ratios

Austria (2000)

Sweden (2003)

Finland (2004)

Hungary (2005)

Slovenia (2004)

USA (2003)

Thailand (2004)

Chile (1997)

Costa Rica (2004)

India (2004)

Mexico (2004)

Senegal (2005)

0 5 10 15 20 25 30 35Age

Financial Independence Around the World

Young adults in Austria, China,

and Sweden become

financially independent at

earlier ages (19–21 years old)

In most countries, young adults are financially independent between 23 and 25 years old

Austria (2000)

Sweden (2003)

Finland (2004)

Hungary (2005)

Slovenia (2004)

USA (2003)

Thailand (2004)

Chile (1997)

Costa Rica (2004)

India (2004)

Mexico (2004)

Senegal (2005)

0 5 10 15 20 25 30 35

Age

Financial Independence Around the World

The young in Nigeria, Mexico, and Indonesia

become financially independent at a

very late age (between 27 and

33 years old)

Full Economic Self-Sufficiency

Austria (2000)China (2002)

Sweden (2003)Uruguay (2006)

Finland (2004)Kenya (1994)

Hungary (2005)Republic of Korea (2000)

Slovenia (2004)Spain (2000)

USA (2003)Japan (2004)

Thailand (2004)Germany (2003)

Chile (1997)Philippines (1999)Costa Rica (2004)

Brazil (2002)India (2004)

Indonesia (2005)Mexico (2004)Nigeria (2004)Senegal (2005)

0 5 10 15 20 25 30 35 40

Age

In most countries, young adults reach full economic self-sufficiency between 25 and 27 years old.

When do the young produce more than they consume?

Does furthering one’s higher education pay?

Returns to Higher EducationStylized Facts1. global returns to education yield about 10%

per schooling year2. returns for females are higher than for males3. general academic streams pay more than

vocational streams4. professional fields pay more than humanities5. return is more prominent in low and middle-

income countries than in high-income countries

Mean Labor Income by Level of Education (index base=100 for upper secondary)

Lower Secondary Upper Secondary Tertiary50

100

150

200

250

Inde

x

Latin America

OECD

Source: Patrinos HA & Psacharopoulos G, 2010

Mean Labor Income by Level of Education (index base=100 for upper secondary)

Lower Secondary Upper Secondary Tertiary50

100

150

200

250

Inde

x

Latin America

OECD

China Rural

Republic of China

China Urban

Human capital is still scarce in Latin America and Asia (except Korea and Japan) relative to OECD countries.

Comparing Returns Over Time

• Republic of China experiences diminishing returns to higher education

• China is going through the stage of increasing returns to higher education

Comparing Mean Labor Income by Gender & by Areas

Junior Male

Junior Female

Upper Male

Upper Female

Tertiary Male

Tertiary Female

0 20 40 60 80 100 120 140 160 180 200

Republic of China Urban 2005

Republic of China Rural 2005

China Urban 2002

China Rural 2002

• both men and women have higher earnings when they have higher educational levels

• in rural areas, basic education (primary & junior high) is more important than the tertiary education level to the income levels

• In urban regions, the returns are highest at the tertiary educational level

• The returns at the tertiary level are similar for males and females in China, as opposed to the general trend of higher returns for males in other countries

Conclusions• We would expect to see an early financial

independence age in low-income economies where entry into the labor force occurs at an early age

• However, the financial independence age is quite similar across countries

• It shows that although the young are working in low income economies, their labor income tends to be very small

Low Income Economies• Furthermore, the young are a large portion of

the population in low income economies.

• This raises an important policy concern about whether or not the young workforce is underproductive, underpaid, or under qualified.

• Human capital investment continues to be important to increase their productivity and the economic growth

High Income Economies-Aging

• Increase of the economic dependency of the young presents an important concern to countries that are and will be experiencing labor shortages and slowing labor force growth due to the aging of their populations

• It poses a challenge to policy makers who must design and implement a sustainable system to reallocate resources from surplus producers to dependent groups in the economy and to reduce the dependency rates.

Middle Income Economies

• The tremendous increase of skilled labor is also a challenge to create job opportunities and prevent brain drain for middle-income countries (e.g. Malaysia &Thailand)