Returns to Education in the Public and Private Sectors: Europe and Central Asia (News and Research 301)

Claudio E. Montenegro and Harry A. Patrinos

The returns to schooling are estimated for 28 European and Central Asian countries using the Mincerian function. Our results show that while the public sector pays on average more than the private sector, the effect of education on earnings is stronger in the private sector. Overall returns are highest at the tertiary level; in terms of private-public differences: the returns are higher in the private sector. [JEL I21, J31]

Introduction

The returns have been estimated for many years. The most recent analyses looked at 160 economies and estimated that every year of schooling increased earnings by 9-10 percent a year on average. These sources provide a reasonable estimate of the returns to education and should be useful for a variety of empirical work.

Over the years, estimates by sector of the economy have also been estimated. It is a stylized fact that the returns for those who work in the private (competitive) sector of the economy are higher than in the public (noncompetitive) sector. The returns for those working in the private sector of the economy are higher than for those working in the public sector. The finding lends credibility that, where productivity matters, education is recognized. There is a clear earnings advantage for workers in the private sector. This new work focuses on Europe and Central Asian (ECA) countries and looks at returns to education for workers in the public and private sectors of the economy and makes appropriate comparisons. It also provides a test of the human capital versus screening views of investment in education, and suggests that the human capital, productivity enhancing approach is supported by the data.

Methodology

To estimate the return to education we use the Mincer (1974) earnings function. We use the common approach of estimating wage regressions for the two sectors of the economy, public and private, for countries in Europe and Central Asia. We use the same methodology as Montenegro and Patrinos (2021). This effort holds constant the definition of the dependent variable, the set of controls, sample definition and the estimation method for all surveys. The returns to schooling are estimated by public and private sectors separately for 28 ECA countries represented in the international income distribution database (I2D2) database (supplemented by the Luxembourg Income Study). Overall returns to a year of schooling by sector are estimated. Returns to sub-sector of education by private/public employment sector are estimated.

Overall Public: Private Mean Earnings Differential

Results

The public sector pays on the average more than the private sector. The unadjusted wage differential is 14 percent higher in the public sector. On average, most workers are employed in the private sector, at 67 percent, but there are a few countries where the public sector dominates.

Pay determination in both sectors is consistent with the human capital model. However, the effect of education on earnings is stronger in the private sector. This implies the private sector recognizes the higher productivity of the educated where market returns matter. The returns to schooling are higher in the private sector, at 7.5 percent, than in the public sector, at 7.2 percent. In fact, in 18 cases returns are higher in the private sector; for another 6 countries, the differences are minimal; only in 5 cases are the returns significantly higher in the public sector.

Returns to Schooling: Public vs Private ECA

Returns to Schooling: Public vs Private ECA

In ECA, overall returns are highest at the tertiary level; in terms of private-public differences: the returns are higher in the private sector, at 9.5 vs. 6.8 percent in the public sector. The returns to experience are higher in the private sector.

Returns to Higher Education: Public vs Private, ECA

Returns to Higher Education: Public vs Private, ECA

Conclusion

The returns to schooling in the private and public sectors was estimated. The public sector pays on the average more than the private sector. On average, most workers are employed in the private sector. However, the effect of education on earnings is stronger in the private sector. This implies the private sector recognizes the higher productivity of the educated where market returns matter. Also, overall returns are highest at the tertiary level; in terms of private-public differences: the returns are higher in the private sector. The returns to labor market experience are higher in the private sector. This paper confirms the human capital view of education as opposed to the screening hypothesis.

This paper gives preliminary evidence that wage determination in the competitive sector is more or less determined by economic variables, such as education, and that strong screening is not as widespread as in the public sector where wages can deviate from marginal productivity not only initially but persistently over the employee’s career. It suggests that in cases where productivity matters, education does continue to have a value after the employee has been under observation for some time (the latter taken into account by the inclusion of the experience variable in the regressions).