Returns to education in vietnam, a clustered data approach

UNIVERSITY OF ECONOMICS HO CHI MINH CITY VIETNAM INSTITUTE OF SOCIAL STUDIES THE HAGUE THE NETHERLANDS VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS RETURNS TO EDUCATION IN VIETNAM: A CLUSTERED DATA APPROACH BY: NGUYEN THI NGOC THANH MASTER OF ARTS IN DEVELOPMENT ECONOMICS HOCHIMINH CITY, DECEMBER 2012 UNIVERSITY OF ECONOMICS HO CHI MINH CITY VIETNAM INSTITUTE OF SOCIAL STUDIES THE HAGUE THE NETHERLANDS VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS RETURNS TO EDUCATION IN VIETNAM: A CLUSTERED DATA APPROACH A thesis submitted in partial fulfilment of the requirements for the degree of MASTER OF ARTS IN DEVELOPMENT ECONOMICS By: NGUYEN THI NGOC THANH Academic Supervisor(s): Assoc Prof Dr NGUYEN TRONG HOAI Dr PHAM KHANH NAM HOCHIMINH CITY, DECEMBER 2012 ACKNOWLEDGEMENT First of all, I would like to express my sincere thank to the Vietnam – Netherlands Programme (VNP) for such a challenging but interesting programme, whereby I enjoyed unforgettable time beside my classmates and broadened my networking via class I am much grateful to famous whole-hearted professors at home and abroad for advanced knowledge and updated information they gave us in class and beyond the class-time Specially, I would like to deeply thank two supervisors: Assoc Prof Dr Nguyen Trong Hoai and Dr Pham Khanh Nam for their helpful and valuable advices on the last but utmost duty, this thesis, that helps me fulfill my study career From the bottom of my heart, I always feel thankful to my Family for their daily care, daily worries, daily happiness with every failure or achievement I get in life I keep looking for chances to bring them happiness To my C16 Classmates, I can say that two-year was a great memory when I am with you all Thank you for your kindness, sharing and support Especially, I cannot forget the enthusiastic disinterested help from Mr Le Anh Khang – our class “Hero” before every final exam He has inspired and motivated me a lot I would like to take this opportunity to say thanks to him formally .Life is still ahead of us, let’s just stop a moment to celebrate our achievement today and keep going forward afterward I wish you all good health, happiness and success for the coming New Year 2013 Cheers ! ABSTRACT Moock et al (2003) did an attempt to analyze the returns to education in Vietnam by using Mincer earnings function based on the 1992–93 Vietnam Living Standards Survey (VLSS) data In this paper, I replicate the job of Moock et al (2003) to reestimate the returns to education by using the 2008 Vietnam Household Living Standard Survey (VHLSS) and Mincerian earnings functions, but with a different regression method, called clustered data at household level using panel commands The study reveals that (1) an additional year of schooling associates with 8.95% increasing in the average rate of return to education, comparing with only 5% in 1992/1993 In terms of gender gap, females experience higher returns to school than males (11.47% vs 8.33%) This pattern is unchanged when referring to result in 1992/1993 (6.8% vs 3.4%); (2) workers in public sector get higher rates of return to education than those in private sector (9.95% vs 5.59%) However, foreign sector is the one has the highest rates of return among the three, 11.9%; (3) university is the best option for schooling investment with the rate of return of 19% higher than upper secondary level while this number was 11% in 1992/1993 Primary level brings back 16% rate of return vs no level (13% in 1992) The rates are 10% for vocational vs primary (4% in 1992); 8% for upper secondary vs lower secondary; while only 2% for lower secondary vs primary Key Words: return to schooling, education, Vietnam, Human Capital, Mincer earnings function, clustered data, random effect model TABLE OF CONTENTS CHAPTER INTRODUCTION 1.1 Problem Statement 1.2 Research Objectives 1.3 Research Questions 1.4 Research Methodology 1.5 Structure of the Thesis CHAPTER LITERATURE REVIEW 2.1 Definition 2.2 A Standard Model of Human-Capital Investment 10 2.3 Empirical Studies on Estimating Returns to Education 12 2.3.1 Selective Empirical Studies in the World 12 2.3.2 Empirical Studies in Vietnam 15 2.4 Analytical Framework 19 2.5 Chapter Remarks 19 CHAPTER RESEARCH METHODOLOGY 21 3.1 Data 21 3.2 Research Methodology 23 3.3 New Approach - CLUSTERED DATA APPROACH in Estimating the Returns to Education 24 3.4 Empirical Models of the Returns to Education 27 3.5 Variable Coding 29 CHAPTER RESEARCH FINDINGS AND DISCUSSION 32 4.1 Descriptive Statistics 32 4.1.1 Distribution of the Dependent and Explanatory Variables 32 4.1.2 Descriptive Statistics of the Dataset 37 4.2 Regression Results 38 4.3 Chapter Remarks 43 CHAPTER CONCLUSION AND POLICY RECOMMENDATION 45 5.1 Conclusion of the Study 45 5.2 Policy Recommendation 46 5.3 Limitations of the Study 47 5.4 Suggestion for further Studies 48 REFERENCE LIST OF TABLES Table 2.1: Empirical studies in Vietnam utilizing Mincer earnings function over the period 1992-2008 17 Table 3.1: Sample of cross-sectional data 26 Table 3.2: Sample of clustered data 27 Table 3.3: Description of the Variables and Variable Coding 30 Table 4.1: Descriptive statistics 38 Table 4.2: Earnings function by years of schooling 39 Table 4.3: Earnings function by sector of employment 40 Table 4.4: Earnings function with schooling levels (for all, males, and females) 41 Table 4.5: Private rates of return to schooling by level of education (%) 42 LIST OF FIGURES Figure 4.1: Histograms of log of earnings (by gender) 32 Figure 4.2: Histograms of log of earnings (by sector) 33 Figure 4.3: Histograms of years of schooling and log of hours worked/week 34 Figure 4.4: Scatterplots of monthly earnings and years of schooling 35 Figure 4.5: Scatterplots of monthly earnings and education levels 36 Figure 4.6: Scatterplots of monthly earnings and years of experience 36 LIST OF ABBREVIATIONS ADB : Asian Development Bank GSO : General Statistics Office IV : Instrument Variable RE : Random Effect OLS : Ordinary Least Squares VHLSS : Vietnam Household Living Standard Survey VLSS : Vietnam Living Standard Survey CHAPTER INTRODUCTION This chapter explains the context of the thesis, its objectives and research questions In addition, a brief of methodology is also mentioned in this part Finally, the structure of the thesis is presented 1.1 PROBLEM STATEMENT Education plays an important role in modern labor markets Hundreds of studies in many different countries and time periods have confirmed that better educated individuals earn higher wage than the less-educated ones A variety of studies have been started with the seminal work by Mincer (1974) who was the first to derive an empirical formulation of earning over the lifecycle In his basic formulation, the logarithm of earnings can be interpreted as years of schooling, years of experience and squared years of experience In Vietnam, since the Vietnam Living Standards Survey (VLSS) firstly conducted in 1992–93 till present, many studies have employed the VLSS data and the Mincerian earnings function to examine rates of return to education in Vietnam, such as: Glewwe & Patrinos, 1998; Gallup, 2002; Moock et al., 2003; Liu, 2006; Nguyen Xuan Thanh, 2006; Vu Trong Anh, 2008; Vu Thanh Liem, 2009; Doan & Gibson, 2010; etc The results are also diverse The most cite study is from Moock et al (2003), in which the authors attempt to analyze the returns to education in Vietnam by using Mincerian earnings function based on the data of VLSS 1992–93 The authors find that the estimated rates of return are quite low (4.8%) In particular, on average, the rates of return to primary and Psacharopoulos and Patrinos (2002) contains rate of return estimates for 98 countries spanning more than 30 years; Trostel, Walker and Woodley (2002) contains estimates for 28 countries; Polachek (2007) contains estimates for 42 countries; etc university education are 13% and 11% But these rates are just 4% and 5% at secondary and vocational levels For higher education (colleges, universities or above), the returns are higher for females (12%) than for males (10%) Now, 20 years have passed, I return to the issue and question for now, what are the returns to education in Vietnam? How have the returns changed? Especially, in term of gender gap, between males and females who receive higher returns to education? In term of sectoral gap, among public, private, and foreign sectors, any discrepancies among these three? The findings are important implications for policy makers in directing the wage and educational policies I would like to replicate the job of Moock et al (2003) to answer these questions by using the Vietnam Household Living Standard Survey (VHLSS), conducted by General Statistic Office (GSO), in 2008 and Mincerian earnings function, but with a different regression method which is first time applied in this kind of estimation, called Clustered data at household level using panel commands 2, instead of using a simple standard cross-sectional OLS estimator From the results, I would like to suggest some policy implications 1.2 RESEARCH OBJECTIVES There are 03 main objectives in this study: (1) To estimate private returns to education by years of schooling and by levels of schooling for both sexes, for males and females; and in private, public and foreign sectors recently; (2) To assess the variation in returns to education by comparing with the findings from Moock et al (2003); Please refer to the chapter on methodology (Chapter 3) for more details Nguyen Xuan Thanh (2006) Estimating the rate of return to schooling in VietNam: A difference-in-difference approach Fulbright Economics Teaching Program Research paper Onphanhdala, P and Suruga, T (2007) Education and Earnings in Transition: The Case of Lao Asian Economic Journal, Vol 21 No 4, 405–424 Phan, D.T (2000) Sectoral job choice and rewards in the Vietnamese labour market PhD dissertation, Economics of Development, National Center for Development Studies, Australian National University, Canberra Princeton University Multilevel Analysis (Ver 1.0) Retrieved Dec 05, 2012 from http://dss.princeton.edu/training/ Psacharopolous, G (1994) Returns to investment in education: A global update World Development, 22(9), 1325-1343 Psacharopoulos, G and Partrinos, H.A (2002) Returns to investment in education: A further update World Bank Policy Research Paper 2881 World Bank, Washington Siphambe, H.K (2000) Rates of return to education in Botswana Economics of Education Review 19 (2000) 291–300 Siphambe, H.K (2008) Rates of return to education in Botswana: Results from the 2002/2003 household income and expenditure survey data set South African Journal of Economics Vol 76:4 December 2008 Polacheck, S (2007) Earnings over the Lifecycle: The Mincer Earnings Function and its Application IZA Discussion Paper No 3181 Trostel, P., Walker, I., and Woodley, P (2002) Estimates of the Economic Return to Schooling for 28 Countries Labour Economic, 9(1): 1-16 51 Vu Thanh Liem (2009) Estimating the rate of return to schooling: A comparision in Vietnam between 1993 and 2006 Unpublished Master thesis Southern Taiwan University of Science and Technology Vu Trong Anh (2008) Estimating the Rate of Return to Schooling in Vietnam The Thesis for Master of Economics, University of Economics of Ho Chi Minh City Vietnamese Education Law of 2005 Retrieved Jan 01, 2006 from http://www.moet.gov.vn/?page=6.3&type=documents&view=2741 Vietnamese Labour Code of 1994 Retrieved from http://moj.gov.vn/vbpq/Lists/Vn%20bn%20php%20lut/View_Detail.aspx?ItemID=10435 52 ... Household Income and Expenditure Survey data (HIES) in 2002-2003 to examine the returns to education in Botswana The author includes such variables as age, education, and marital status in probit equation... financing institutions to 46 engage in education loans and create favorable conditions for individuals to access to preferential loans (3) The rates of returns on vocational and upper secondary... multivariate analysis explores that an additional year of schooling associates with 8.95% increasing in the average rate of return to education, in which females experience higher returns to school