Mridusmita Bordoloi: Returns to education

With the latest Budget increasing allocation to education and emphasising primary schooling, it is the right time to address the issue of returns to education. Formal education is an important determinant of individual earnings as well as of economic growth, and while data might differ, evidence from numerous studies is quite clear "" those with greater levels of education, skills and work-experience have greater incomes, even after correcting for individual, household and other differences. But what does it mean to the individual to spend the extra years in school "" what is the monetary benefit at the margin?

An econometric exercise conducted by Indicus Analytics, using data from an all-India representative survey of more than 40,000 earners by the ministry of finance threw up some interesting results. After correcting for impact of socio-economic background, age, gender and work-experience, the preliminary findings are as expected "" an individual's income increases significantly with each level of higher education.

There is a 31-percentage point difference in income between those who are illiterate and those who have completed primary education with similar background. Overall, for the first eight years of schooling in elementary school, every extra year of schooling yields about an additional 5 per cent increase in incomes. What is more interesting is that within school, the returns per year fall for middle school and are the highest for high school.

Graduate and diploma holders are likely to earn almost 47 per cent more than those who complete higher secondary level "" a 16 per cent average increase per year of study for three years of college. Again, a professional degree holder is likely to earn around 35 per cent more than a graduate or a person with a technical diploma with similar socio-economic backgrounds. Looking at returns to education per year, professional education and post-graduation yield similar returns. Each year spent in professional education or post-graduation adds 27 per cent more to a person's income.

Other findings of the study reveal that those from well-off families have marginally higher income than their peers from less well-to-do homes. But, the income of a scheduled caste or tribe individual is likely to be lower by about 11 per cent as compared to one from a forward caste. If female, the impact is even worse "" females are likely to earn around 36 per cent less than males with similar background, confirming that gender discrimination still prevails in the labour market. The spread of education can resolve these rigidities, but that is possible only if children remain in school.

For educational policy, the message is clear "" higher income growth calls for greater education; but mere primary education will not suffice. It is critical to ensure: (a) quality of delivery that guarantees that children continue with higher education; and (b) content that enables flexibility in later occupational choice. The government should look beyond merely targeting increases in the number of schools, classrooms and so on, and should focus on quality of delivery within these institutions.

The writer is Principal Analyst, Indicus Analytics, New Delhi