Convexity and Sheepskin Effects in the Human Capital Earnings Function: Recent Evidence for Filipino Men

Abstract

A revised version was published as Convexity and Sheepskin Effects in the Human Capital Earnings Function: Recent Evidence for Filipino Men. Oxford Bulletin of Economics and Statistics 65 (2), May 2003.

Data on education in the Philippines show that there are large differences in the private rate of return to education by level: the wage premia associated with an additional year of schooling are about twice as large at the university level as they are at the primary school level. In addition, there are large sheepskin effects. Completion of the last year of schooling within a given level is rewarded disproportionately, particularly for university graduates.

Much attention has been paid to the issue of possible nonlinearities in the relationship between log wages and schooling in the literature on both the United States and developing countries. Schady uses data from a recent household survey for the Philippines, the 1998 Annual Poverty Indicator Survey, to test the fit of the log-linear specification for Filipino men. He presents results based on various estimation strategies, including spline regressions and semi-parametric regressions with a large number of dummy variables for years of schooling and experience. He concludes that: - There appear to be large differences between rates of return to education across different levels in the Philippines. The wage premia for both primary and secondary education are significantly smaller than those for tertiary education. - Within each level - primary, secondary, and university - the last year of schooling is disproportionately rewarded in higher wages. That is, there appear to be clear sheepskin effects associated with graduation.

This paper - a product of the Poverty Reduction and Economic Management Sector Unit, East Asia and Pacific Region - is part of a larger effort in the region to understand the links between education, earnings, and welfare.