The returns to education in Indonesia: Post reform estimates

Abstract

The profitability of an investment in education in Indonesia has been a discussed issue for the past decades. Both Deolalikar (1993) and Duflo (2001) provided comprehensive estimates of returns to investment in education in Indonesia and both of them argued that schooling was a profitable investment. This paper updates the evidence on the profitability of an investment in education in Indonesia, using OLS and IV approaches. It describes the statistical relationship among market earnings, years of schooling, age and job tenure (experience), and quadratics of age and tenure, marital status, male-female and rural-urban dummies. In the analysis, we use primary data from the Indonesian Family Life Survey 4 (IFLS4). IFLS4 is a nationally representative sample comprising 13,536 households and 50,580 individuals, spread across provinces on the islands of Java, Sumatra, Bali, West Nusa Tenggara, Kalimantan, and Sulawesi. The earnings function is estimated on three samples: a combined sample of males and females (with a female intercept shift term), and separate samples of male and female workers. The empirical results show that the returns to schooling in Indonesia are 4.72 per cent for the combined sample, 4.36 per cent for males, and 5.26 per cent for females. However, the relationship between years of schooling and earnings is not statistically significant in any of the IV estimations. We also make comparisons with the findings of Duflo (2001), based on earlier data for 1995. These comparisons enable an assessment of any changes in the ability bias over this period of market reform. The IV estimates are the same as, or greater than, the OLS estimates. This is consistent with the literature for developed countries, and suggests that ability does not attract a wage premium but may be correlated with the instruments. Although adopting the IV approach increases the estimated returns to schooling in Indonesia, these returns remain low compared to other Asian as well as less developed countries. Therefore, the marketoriented economic reforms that has been going on over the past several decades should be evaluated by the policy makers considering whether these reforms generating higher jobless growth or not and take proper policy measure, if there is any.JEL Classifications: I21, I22, J30, J31

Can Unconditional In-Kind Transfers Keep Children Out of Work and in School? Evidence from Indonesia

“…First, girls have significantly higher returns to schooling which is approximately one to two per cent higher than that of boys in Indonesia (Deolalikar, 1993;Dumauli, 2015 andPurnastuti et al, 2015). Second, by increased participation in school, girls would have better chance for education, health and safety leading to other positive outcomes such as a reduction in child marriages and sexual exploitation (World Bank, 2017).…”

Educational Assistance and Education Quality in Indonesia: The Role of Decentralization

“…Nevertheless, there has been only slow progress in improving education quality, despite the country's achievement in expanding access to education. The secular decline in returns to schooling between 1993 and 2007 reflects the fact that quality of education does not respond well to market demand (Purnastuti, Miller, and Salim ) and that the quality of education in Indonesia is comparatively lower than in other Asian nations and in other less‐developed countries (Purnastuti, Salim, and Joarder , 191). Learning outcomes have also been on a downward trajectory compared with global outcomes.…”

Aspirations, Human Capital Investment, and the Intergenerational Transmission of Poverty in Indonesia

“…This conjecture, initially proposed by(Ray, 2006), is also in line with the literature on reference points(Kahneman and Tversky, 1979;Kőszegi and Rabin, 2006;Shalev, 2000).2 Returns to schooling remain low in Indonesia compared to other Asian and less developed countries(Purnastuti et al, 2015).3 According to the World Values Survey, 60% of Americans believe that the poor are lazy or lack of willpower, and over 70% of people do not believe the poor are trapped in poverty(Glaeser and Sacerdote, 2001).4 See Sect. 3.2 for more information about the relative education years.…”