Asian Development Outlook 2007: Change Amid Growth - Education and structural change in four Asian countries

This chapter has examined the evolving distribution of education, wages, and employment in four Asian countries. It found education levels running ahead of employment growth in sectors that have traditionally hired the educated. Education levels rose in almost all sectors and occupations. This result is normatively ambiguous. Education levels may have risen within activities because they were too low from a productivity perspective to begin with. In this view, rising education levels should have increased productivity. Alternatively, education levels may have risen simply because education has become cheaper, unemployment is high, incomes are rising-or any number of other reasons unrelated to the productivity benefits of education.

It was therefore important to distinguish between two sets of explanations of education intensification: that it has been driven by productivity imperatives; or by something other than productivity imperatives. Under the assumption that worker productivity is reflected in wages, wage returns to education in specific sectors and occupations were therefore examined.

The returns to basic education have fallen, and now lie below the cost of funds in several sectors and occupations. Moreover, the sector this occurs in varies by economy. There is evidence that Filipino and Indian agricultural workers are overeducated, as are Filipino and (perhaps) Thai industrial workers. Furthermore, there are particular groups of workers, including Indian agricultural laborers, and drivers and maids everywhere, who receive a negligible return on their schooling. In the Philippines, where job creation has been anemic, the education levels and employment shares of drivers and maids are increasing. This is a sure sign that marginal educated workers reap no rewards for their schooling.

3.2.6 Education profile and wage indexes of retail sales staff

N = none; IP = incomplete primary; M = middle; P = primary; ILS = incomplete lower secondary; LS = lower secondary; HS = higher secondary; IT = incomplete tertiary; T = tertiary.

Note: Limited to those reporting wages.

Sources: India National Sample Survey Organisation, Socio-economic Survey, Schedule 10, 1993/94, 2004; Philippine Labor Force Survey, 1991, 2004, October rounds; Thailand Labor Force Survey, 1995, 2005, October rounds.

Click here for figure data

3.2.7 Education profile and wage indexes of clerical workers

Click here for figure data

However, the point of this discussion is not that education subsidies need to be scaled back. Overeducation can be resolved relatively quickly through declines in the cost of funds, and more occasionally by dramatic technological shifts. Rather, the point is that severe distortions must be hindering job creation and economic dynamism, thereby muting the pecuniary benefits of schooling.

It is often argued that it is in fact the limited supply of educated workers itself that is the constraint on economic dynamism. Surely growth of Filipino call centers and of IT-enabled services in India is hindered by a shortage of suitably educated workers? After all, call center managers informally interviewed for this work believe the employment opportunities in the sector to be substantial, if education bottlenecks can be overcome. This is certainly possible, and job creation in the sector would indeed bring benefits. However, there are at least three reasons against forging education policy based on the conclusion that raising target schooling levels will unleash transformation through high-end services.

First, as shown in this chapter, the employment shares of these sectors are extremely small, so projecting their capacity to create a large number of jobs involves tremendous out-of-sample extrapolation. Magtibay-Ramos et al. (2007) argue that to meet the forecast of the business process outsourcing (BPO) industry (and subsequently the Government) of 1 million BPO jobs in the Philippines by 2010, over one quarter of all new jobs would have to be in the industry-a historically unusual figure. Furthermore, other constraints, lurking just out of sight, may become apparent as the sectors expand. This is indeed one of the key lessons of the young literature on binding constraints to growth.

Second, the economic cost of bottlenecks should be considered. Certainly in India's high-end services, salaries have sky-rocketed to industrial-economy levels, and job retention is becoming harder as workers leave one job in the sector for more remunerative options elsewhere in the sector. In the Philippines call center business, the impact of education bottlenecks on productivity growth is much less clear. Call center salaries for college graduates range from $250 to $400 a month-or around two or three times GDP per capita-an attractive number, but perhaps less so for graduates of the nations' top universities. As constraints on growth go, this is not particularly expensive. Moreover, employers report rising rates of absenteeism and that worker retention is becoming a problem. Anecdotally speaking, employees frequently leave the profession in favor of less remunerative jobs that do not require them to work the "graveyard shift. "Thus, the wages paid by the sector overstate the welfare improvement for workers.

Third, it is not obvious that the skills required in all of these professions are best obtained through general education. Several call center managers have expressed the view that their employees

3.2.8 Education profile and wage indexes of bookkeepers/cashiers

N = none; IP = incomplete primary; M = middle; P = primary; LS = lower secondary; HS = higher secondary; T = tertiary.

Note: Limited to those reporting wages.

Sources: India National Sample Survey Organisation, Socio-economic Survey, Schedule 10, 1993/94, 2004; Indonesia SAKERNAS 1994, 2004; Thailand Labor Force Survey, 1995, 2005, October rounds.

Click here for figure data

3.2.9 Education profile and wage indexes of engineers and engineering technicians

N = none; IP = incomplete primary; M = middle; P = primary; LS = lower secondary; HS = higher secondary; T = tertiary.

Note: Limited to those reporting wages.

Sources: India National Sample Survey Organisation, Socio-economic Survey, Schedule 10, 1993/94, 2004; Thailand Labor Force Survey, 1995, 2005, October rounds.

Click here for figure data

probably learned their English outside the classroom. Reports are starting to trickle in that firms in both countries are entertaining reasonable alternatives to college-educated workers. Some are establishing in-house training programs and report being satisfied with the results, while others are seeking high school graduates with the requisite skills. Despite the sector's growth potential, these trends cast doubt on the relevance of this potential for education policy.

This chapter has therefore argued that policy advisers should price constraints to growth via the return to education before forging conclusions on education policy. This being done, it takes no issue with the view that some select groups of educated workers are in short supply and that this is a constraint to growth.

One final issue concerns the quality of education. Results from the labor force surveys are only representative of the quality of education typically available in each country. Certainly, raising the quality of education might increase the returns to schooling and probably would be helpful for igniting growth. Lacking data on school quality, this chapter cannot speculate on these issues. It is certainly possible-even likely- that higher-quality education will precipitate higher rates of investment and job creation, particularly in industry and services. This point made, and given that returns to the types of basic education available have fallen fast, this chapter concludes that it is mainly by measuring and credibly delivering improvements in quality that basic education projects could contribute directly to structural change and growth.

These caveats notwithstanding, the employment numbers provided are quite sobering, and caution against mechanically raising general education targets in the hope of generating growth. Certainly other reasons exist for raising education levels. But expectations of the contribution of education to structural change must be rooted firmly in a thoughtful, empirical understanding of what workers are likely to do with their education. The evidence provided suggests that when economies or sectors stagnate, the availability of jobs and new technologies may do more for many than more time in the classroom.

Bibliography and References

Aghion, Philippe and Peter Howitt. 1998. "Endogenous Growth Theory. "The MIT Press, Cambridge, Mass., and London, United Kingdom.

Azariadis, Costas and Allan Drazen. 1990. "Threshold Externalities in Economic Development. "Quarterly Journal of Economics, Vol. 105, No. 2, pp.501–526.

Anant, T.C.A., R. Hasan, P. Mohapatra, R. Nagaraj, and S.K. Sasikumar. 2006. "Labor Markets in India: Issues and Perspectives. "In J. Felipe and R. Hasan (eds.) Labor Markets in Asia, Issues and Perspectives. Basingstoke, United Kingdom: Palgrave Macmillan, pp.205–300.

Braverman, Harry. 1974. "Labor and Monopoly Capital: The Degradation of Work in the 20th Century. "Monthly Review Press, New York, NY.

Benhabib, Jess and Mark M. Spiegel. 1994. "The Role of Human Capital in Economic Development: Evidence from Aggregate Cross-Country Data. "Journal of Monetary Economics, Vol. 34, pp.143–173.

Bils, Mark and Peter J. Klenow. 2000. "Does Schooling Cause Growth?" The American Economic Review, Vol. 90, No. 5, pp.1160–1183.

Booth, Anne. December 1999. "Education and Economic Development in Southeast Asia. Myths and Realities. "ASEAN Economic Bulletin, Vol. 16, No. 3, pp.290–306.

Duflo, Esther. 2001. "Schooling and Labor Market Consequences of School Construction in Indonesia: Evidence from an Unusual Policy Experiment. "American Economic Review, Vol. 91, No. 4, pp.795–813.

Felipe, Jesus and Leonardo Lanzona, Jr. 2006. "Unemployment, Labor Laws and Economic Policies in the Philippines. "In J. Felipe and R. Hasan (eds.) Labor Markets in Asia, Issues and Perspectives. Basingstoke, United Kingdom: Palgrave Macmillan, pp.367–501.

Foster, Andrew D. and Mark Rosenzweig. 1996. "Technical Change and Human-Capital Returns and Investments: Evidence from the Green Revolution. "American Economic Review, Vol. 86, No. 4, pp.931–953.

Galor, Oded and Joseph Zeira. 1993. "Income Distribution and Macroeconomics. "Review of Economic Studies, Vol. 60, No. 1, pp.35–52.

Glewwe, Paul. 2002. "Schools and Skills in Developing Countries: Education Policies and Socioeconomic Outcomes. "Journal of Economic Literature, Vol. 40, No. 2, pp.436–482.

Hanushek, Eric A. and Ludger Woessmann. 2007. "The Role of School Improvement in Economic Development. "National Bureau of Economic Research Working Paper 12832.

Harberger, Arnold. 1965. "Investment in Men Versus Investment in Machines: The Case of India. "In C. Arnold Anderson and Mary-Jean Bowman (eds.) Education and Economic Development. Chicago: Aldine Publishing, pp.11–50.

Hasan, Rana and Aashish Mehta. September 2006. "Under-representation of Disadvantaged Classes in Colleges: What do the Data Tell Us?" Economic and Political Weekly, pp.3791–3796.

Islam, Nazrul. 1995. "Growth Empirics: A Panel Data Approach. "Quarterly Journal of Economics, Vol. 110, No. 4, pp.1127–1170.

Krueger, Alan and Mikael Lindahl. 2001. "Education for Growth: Why and for whom?" Journal of Economic Literature, Vol. 39, No. 4, pp.1101–1136.

Lewis, William. 2004. The Power Of Productivity. Chicago: University of Chicago Press.

Ljungqvist, Lars. 1993. "Economic Underdevelopment: The case of a Missing Market for Human Capital. "Journal of Development Economics, Vol. 40, pp.219–239.

Lucas, Robert E., Jr. 1988. "On the Mechanics of Economic Development. "Journal of Monetary Economics, Vol. 22, No. 1, pp.3–42.

Maglen, L. and R. Manasan, 1998. Education Costs and Financing in the Philippines. Manila: Asian Development Bank.

Magtibay-Ramos, Nedelyn, Gemma Estrada, and Jesus Felipe. 2007. "An Analysis of the Philippine Business Process Outsourcing Industry. "ERD Working Paper No. 93. Asian Development Bank. March.

Mankiw, N. Gregory, David Romer, and David N. Weil. 1992. "A Contribution to the Empirics of Economic Growth. "The Quarterly Journal of Economics, Vol. 107, No. 2, pp. 407–437. May.

McEwan, Patrick J. 1999. "Private Costs and the Rate of Return to Primary Education. "Applied Economics Letters, Vol. 6, No. 11, pp.759–760.

McGuinness, Seamus. 2006. "Overeducation in the Labour Market. "Journal of Economic Surveys, Vol. 20, No. 3, pp.387–418.

Mincer, Jacob. 1958. "Investment in Human Capital and Personal Income Distribution. "The Journal of Political Economy, Vol. 66, No. 4, pp.281–302.

Nelson, Richard R. and Edmund S. Phelps. 1966. "Investment in Humans, Technological Diffusion, and Economic Growth. "American Economic Review, Vol. 56, No. 2, pp.69–75.

Pratham. 2005. Annual Status of Education Report. Pratham Resource Center, Mumbai.

Pritchett, Lant. 1996. "Where Has All the Education Gone?" World Bank Policy Research Working Paper 1581.

Psacharopoulos, George and Y.C. Ng. 1994. "Earnings and Education in Latin America. "Education Economics, Vol. 2, No. 2, pp.187–207.

PROBE Team. 1999. "Public Report On Basic Education in India. "Oxford: Oxford University Press.

Quisumbing, L. 1989. "The DECS bilingual education policy. "In M. C. Sutaria, J. S. Guerrero, and P. M. Castano (eds.) Philippine education: Vision and perspectives. Manila: National Book Store Inc, pp.309–315.

Romer, Paul. 1990. "Endogenous Technological Change. "Journal of Political Economy, Vol. 98, No. 5, Pt. 2, S71–S102.

Rosenzweig, Mark. 1995. "Why are there Returns to Schooling?" American Economic Review, Vol. 85, No. 2, pp.153–158.

Sugiyarto, G., M. Oey-Gardiner, and N. Triaswati. 2006. "Labor Markets in Indonesia: Key Challenges and Policy Issues. "In J. Felipe and R. Hasan (eds.) Labor Markets in Asia, Issues and Perspectives. Basingstoke, United Kingdom: Palgrave Macmillan, pp.301–364.

World Bank. 2006. World Development Report 2007. "Development and the Next Generation. "Washington, DC.

Datasets used and sources
Country	Source	Date
India	Socio-Economic Survey, Schedule 10, National Sample Survey Organisation, India	1993/94 (Round 50), 2004 (Round 60)
Indonesia	SAKERNAS, Badan Pusat Statistik, Indonesia	1994, 2004
Philippines	Labor Force Survey, National Statistics Office, Philippines	1991, 2004 October rounds
Thailand	Labor Force Survey, National Statistics Office, Thailand	1995, 2005 October rounds

The authors are grateful to Guntur Sugiyarto for providing statistics from the Indonesian SAKERNAS labor force surveys.

Catalog

Conclusions

Bibliography and References