The Implications of Changing Private Rates of Return to Schooling By Harry Anthony Patrinos

By Harry Anthony Patrinos, World Bank.

High returns signal that tertiary education is a good private investment; the public priority, however, isn’t a blanket subsidy for all, but a concerted effort to improve fair, equitable, sustainable cost-recovery at the tertiary level.

In addition to being a basic human service, education produces some strong economic benefits. One of the most commonly cited is labour market earnings.  Known as the returns to investment in schooling, they have been calculated since at least the 1950s. It is only recently that we have had such estimates for the vast majority of countries.

In many emerging economies, education and labour market experience are the only assets for a vast part of the labour force, especially the poor. Therefore, it is important for students, their families, providers and funders to know the economic benefits of investments in schooling.  For the individual, weighing costs and benefits means investing as long as the rate of return exceeds the private discount rate (the cost of borrowing and an allowance for risk).

In a recent paper with Claudio Montenegro we report the latest estimates of the private – what the individual student earns – returns to schooling using comparable data from 139 economies and 819 harmonized household surveys.  The results of the study show that there are significant returns.

The global average private rate of return to schooling is 10 percent per year of schooling.  The returns are highest in Sub-Saharan Africa (13 percent).  The five economies with the highest returns are all in Africa: Botswana, Ethiopia, Rwanda, South Africa and Tanzania.  Returns are lowest in the Middle East and North Africa (7 percent).

The returns to schooling are higher for women.  The overall rate of return to another year of schooling for women is 12 percent and 10 percent for men.  At the primary school level the returns are about the same.  At the secondary and tertiary levels, the returns diverge, with higher returns for females at the secondary (9 versus 7 percent for men) and tertiary (17 versus 15) levels.

In a stunning reversal from previous compilations, and what might be surprising to many, the private returns to university education are now higher than the returns to primary schooling. The returns to primary schooling are above 10 percent, and they decline precipitously at the secondary level to just over 7 percent, before jumping to 15 percent at the tertiary level.  Still, the returns are higher in Sub-Saharan Africa at all levels.  There are variations by region: there are high returns to primary schooling in the Middle East and North Africa (especially for females), while the returns to tertiary are low.  Returns to primary schooling are surprisingly low in South Asia.

The biggest change in the patterns observed is that the returns to primary education are no longer the highest.  However, the results reported here are private returns.  Policy makers need to know the social returns to schooling.  Yet, there are policy implications emanating from this compilation.  There are three important policy lessons.  The first is that there is a continuing need to focus public investment on the poor.  The returns to primary schooling may be falling because the quality is poor.  If the quality is poor, then access to the secondary and tertiary levels for the poor will slow down and higher returns at the tertiary level will lead to growing inequality.  A focus on the poor, starting with quality basic education, is also an investment in the higher education of the poor in the near future.

Therefore, the second implication is to invest in education quality.  The focus on basic education emphasized access and not enough attention has gone towards quality.  Access to basic education increased considerably over the last few decades.  Lower returns to primary schooling do not imply that one should abandon basic education as a priority.

The third implication is that higher education should be expanded.  High returns to tertiary signal that university is a good private investment.  Therefore fair, equitable, sustainable cost-recovery at the university level is warranted.

Harry Anthony Patrinos is Practice Manager, Education at the World Bank. Email: Hpatrinos@worldbank.org

This blog is based on an article in the forthcoming issue of NORRAG NEWS on ‘Financing Education & Skills’, due out in May 2015 at www.norrag.org

NORRAG (Network for International Policies and Cooperation in Education and Training) is an internationally recognised, multi-stakeholder network which has been seeking to inform, challenge and influence international education and training policies and cooperation for almost 30 years. NORRAG has more than 4,200 registered members worldwide and is free to join. Not a member? Join free here.