In India, drivers and maids, at great personal sacrifice, desperately want to enrol their kids in an “English-medium” school so that their children can get a passport out of their drudgery. They understand the gains from investing in education. But whether their kids understand that or not is another matter. The authors say the simple proposition that the higher the return, the higher the investment in education, apparently hasn’t been empirically proved in economic theory, “both because variation across individuals in the rate of return to schooling is rarely observed, and because sharp changes in this return rarely occur”.
Also Read | How responsive is investment in schooling to changes in returns? (paper)
The authors, however, do get a chance to observe a change in the rate of return. How? Because in the communistic kibbutzim (plural of kibbutz, a kind of collective farm) in Israel, wages were originally equal, independent of a worker’s productivity. A reform of this system was then made, to a system of wages on the basis of productivity. Surely this would increase investment in education, because the returns to human capital had been increased?
The pay reform was not carried out in all the kibbutzim at the same time. The authors found that students in kibbutzim that reformed early increased their investment in education, or studied harder, as seen from their matriculation scores. Their scores were much above the scores from those kibbutzim that hadn’t reformed their wage structure. That’s hardly surprising, because in the unreformed kibbutzim where is the incentive to do well, since everybody is paid the same. Moreover, the scores were higher in kibbutzim that reformed the most—students had the greatest incentive to do well there.
Further, students who came from poorer backgrounds improved their scores the most. The authors say this is because a future dollar increase in their incomes is more valuable for students who expect to end up in the lower end of the income distribution.
Simply put, a dollar is more valuable to the poor than to the rich and, therefore, the incentive for poorer students is larger. Also interesting is their conclusion that the performance of boys was more affected by the wage reform. This could be because many girls did not expect to be the primary wage earners in their families and hence the incentive of the higher wages was not so potent.
The authors say the implications of their study extend beyond Israel. For instance, they point out that the transition from a centrally planned to a market economy in the former Soviet republics is another important historical episode that resulted in an increase in the rate of return to schooling.
The authors also say that “our findings may suggest the likely human capital consequences in developing countries that liberalized their labour markets, for example Vietnam in the mid 1980s, and as a result experienced increases in the returns to schooling”.
The same would hold true of India as well, as it moved to being an increasingly more globalized market economy, where the returns to education and skills became far more than in the earlier closed economy. The proliferation of coaching classes is witness to the desire to invest in a good education and increase one’s earnings.
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