Mohammad Osman Adel

Economic return to schooling in Afghanistan

Volume | 043 Bochum/Kabul | 2017

www.afghaneconomicsociety.org
Economic Return to Schooling in Afghanistan

Economic Return to Schooling in Afghanistan

Mohammad Osman Adel

Keyword list:

Schooling, earning, wage, wage gap, human capital, education, Mincer model

Abstract

This study has focused on the estimation of economic return to schooling in Afghanistan. It is
based on the human capital theory, which examines the marginal effect of schooling and work
experience on the individuals’ earnings. The main objective of this study is to estimate the effect
of years and levels of schooling on the wages, which identifies the wage gap between schooled
and unschooled workers. Likewise, it estimates the effect of other important factors on wages,
such as skills, sex and sector type.
The Mincer’s model (OLS) has been employed in this research as the estimation method using
the regression of wage on years of schooling to examine the wage difference between schooled
and unschooled employees. The empirical result of the regression analysis shows that there is a
significant difference between the earnings of schooled and unschooled employees in
Afghanistan. The individuals who have completed high school earn 67.9% higher wages than
those who have not enjoyed of education. This indicates the applicability of the human capital
theory and desirable return to schooling in Afghanistan. Similarly, the significant effect of
education and other human capital factors on individuals’ earnings encourage policy makers and
families to invest properly in education field of Afghanistan.

Description of Data

The selected area for the empirical research is Herat city in Afghanistan. The primary data has
been collected through questionnaires from employees. It does not contain the individuals who
are not employees, because there are much more interfering factors on the wage of unemployed
individuals in Afghanistan. So, in order to minimize the interference of other effective factors on
individuals’ earnings, only employees have been selected as the target sample. This sample was
divided into two groups, educated and uneducated individuals. Furthermore, the percentage of
gender (15% female workers) and the age interval (20-50) in both groups were kept equal in order
to have a better assessment and comparison between the two groups. It is also worth mentioning
that Herat city has been selected as the target area for the empirical study, because the relatively
better security conditions in this city paved the way for easier collection of more reliable data.

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Economic Return to Schooling in Afghanistan

In addition to the collection of primary data, secondary data was gathered through desk study on
the related literatures and reliable reports such as World Bank, UNECEF, ILO, NRVA and
Afghanistan Statistical Yearbook.

Research Question/Theoretical contextualization

This study is based on the human capital theory, which indicates that education is an investment,
which leads to income generation. This theory introduced by Becker (1964) claims that education
is an investment that can lead to income production, thus, wage differential is influenced by
differences in the individuals’ productivity, which are themselves influenced by investments in
education and/or the level of trainings received throughout their lives (Cahuc & Zylberberg, 2004,
p. 69).
A variety of studies in different countries over time have confirmed this hypothesis that better-
educated individuals earn higher wages, they experience less unemployment, and they get more
prestigious jobs than their less-educated counterparts (Card, 1999, p. 1802).

Schooling, as a primary source of human capital, plays a fundamental and positive role on the
individuals’ earnings (wages). The theory of human capital, developed by Becker (1962) and
Mincer (1974) views education as the main source of human capital, that has direct and positive
effect on individuals’ earnings. The wage differential arises from different human capital and non-
human capital factors, and it is a persistent phenomenon in the world. Yet, there are instances
that labors earn different wages while performing the same jobs with similar education and skills
set (Stiglizt, 1997, p. 529).

The rate of return to education has been globally studied since the late 1950s. The conventional
approach used to estimate the return to education is the standard Mincer earnings function,
introduced by Jacob Mincer (1974). It is the most widely used model in the empirical literature for
the estimation of return to schooling. There is an impressive range of studies which estimate the
return to schooling particularly by defining the dummy variables for different levels of school, in
order to identify the economic return for each level (Nasir & Nazli, 2000, p. 6).
Pascharapoulos provided a comprehensive update of the estimated rates of returns to education
at a global scale. He found that the rate of return for one additional year of schooling is 11.2
percent in low income countries and 9.6 percent in Asia (Pascharapoulos, 1994, p. 1329).
Similarly, the rate of return for one additional year of schooling was 7.3 percent in both Pakistan
and Iran (Nasir, 2000, p. 13 & Afshari, 1995, p. 157).
The GDP per capita for Afghanistan is US$696, which was estimated by Afghanistan Statistical
Yearbook (2016; p. 2). Afghanistan is still in the list of poorest countries in the world and one of

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Economic Return to Schooling in Afghanistan

the main causes of persistence poverty could be the low rate of human capital in this country.
Even though it has been widely accepted that education nurtures the citizens of a country and
elevates the general standard of living in a society (Olaniyan, 2008, p. 479), there is still no proper
investment in the field of education in Afghanistan. Therefore, it is a clear need to highlight the
role of human capital on income generation in this country.

This study is important from three standpoints: first, it estimates the effect of years of schooling
on individuals’ earnings and identifies the wage gap between schooled and unschooled
individuals. Second, it estimates the marginal return for each level of schooling, such as primary
school, secondary school, High School and technical school. Third, since this research identifies
the wage gap between schooled and unschooled individuals and highlights the role of schooling
in explaining the income difference, it has the ability to encourage policy makers and families to
make proper investments and focus on schooling.

This study aims to answer the following research questions empirically:

1) Does schooling increase the individuals’ earnings?

2) What is the rate of economic return for each level of schooling?
3) Is sector type highly effective on the wage of Afghan employees?

These questions are empirically answered by the OLS estimate of wage functions. At first, the
rate of return to each year of schooling is analyzed by an OLS regression of the standard earning
function of the Mincers’ model. Then, to incorporate the human capital and non-human capital
factors into OLS regression, the standard form of the Mincers’ model is extended, and as a result,
a new earning function is designed. The positive sign of the coefficients for years of schooling
and levels of schooling in the OLS regression of the human capital earning functions would be
the positive answer for question one and the size of the mentioned coefficients determine the
answer of question two. Likewise, the size of the coefficients for sector variables determines the
answer of question three.

Field research design/ Methods of data gathering

The target population of this study was the employees of government, Non-governmental
Organizations (NGOs) and private organizations. The primary data was collected through 400
questionnaires in the field research interviews during Jan-Mar 2013 in Herat city. This study used
the stratified random sampling method. The approach of “with and without” has been employed
in this study, which means that the target population was divided into two groups, then two types
of questionnaires were designed. One group included individuals who have been schooled, the

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Economic Return to Schooling in Afghanistan

so-called coverage group, and the other group included individuals who have not been schooled,
the so called control group. The number of questionnaires has been equally distributed between
these two groups as it is described in table 1:

Table1: Distribution of the Questionnaires

# of ques. for # of ques. for Total # of # of observed

Sector
schooled individuals unschooled individuals ques. organizations

Government 50 50 100 25
NGOs 50 50 100 25
Private Firms 100 100 200 37
Total 200 200 400 87
Source: Field research data (n = 400)

The term of schooling here means the formal form of education where students are trained in a
classroom about certain curriculum based subjects and it does not include the higher education.
So, in order to examine the effect of years and levels of schooling on individuals’ earnings the
schooling periods have been divided into four levels according to the education system of
Afghanistan (World data on education, 2010/11, p.7).

1) Primary education which consists of 6 years of schooling (grade 1 to 6);

2) Secondary level (lower secondary) which consists of 3 years (grade 7-9);
3) High school (upper secondary) which consists of 3 years (grade 10-12);
4) Vocational/Technical level (post-secondary) which consists of 2 years (grades 13-14).

The term of individuals’ earnings has been translated here into monthly wage that is defined as
the dependent variable. Similarly, the years and levels of schooling have been defined as the
main independent or explanatory variables. As it has been already discussed, theoretically, there
is a positive correlation between schooling and wage, because schooling increases the working
productivity and efficiency of individuals, which in turn increases their qualifications for earning
higher wages.
This study used Mincer’s human capital model, which is a benchmark model for empirical studies,
to estimate the rate of economic return to schooling. The standard form of Mincer’s model is
presented as follow:

ln Wi = α + β1 educ𝑖 + β2 exp𝑖 + β3 𝑒𝑥𝑝𝑖2 + εi (1)

Where (ln Wi ) stands for the natural logarithm of monthly earnings, educ𝑖 represents completed
years of schooling, and exp𝑖 is the labor market experience of ith individual. Letter β1 denotes the

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Economic Return to Schooling in Afghanistan

marginal rate of return to school. A positive value of β2 and negative value of β3 reflects the
concavity of the earning function with respect to market experience. Letter εi is the error term,
assumed to be normally and identically distributed with zero mean and constant variance of 𝛿𝑢2 .

Since the different school years and levels impart different skills and therefore have different effect
on earning, it is misleading to assume a uniform rate of return for all education levels (Nasir &
Nazli, 2000, p. 6; Nasir, 2002, p. 5), therefore the human capital earning function of Mincer has
been extended into equation (2) to entail the levels of schooling instead of years of schooling and
the other important and effective factors on the individuals’ earnings.

ln Wi = α + β1 PRIMi + β2 SECDi + β3 HSCHi + β4 VOCi + β5 ENGSK i + β6 COMSK i +

β7 AGEi + β8 AGEi2 + β9 CLER i + β10 PROFi + β11 MANAGi + β12 PRIVi + β13 NGOi +
β14 SEX i + β15 MARRIEDi + εi (2)

Where:

- PRIM = Primary level, dummy variable, which is 1 if individual’s school level is

6 years and 0 otherwise;
- SECD = Secondary level, which is 1 if attained level of school for an individual is
9 years and 0 otherwise;
- HSCH = High school level, which is 1 if attained level of school for an individual is 12 years and 0 otherwise;
- VOC = Vocational/Technical level, which is 1 if individual’s attained level school is 14 years and 0 otherwise;
- ENGSK is a dummy variable for English language skill, which takes the value of 1 if the English skill level of
individual ith is any of the three levels (Basic, Intermediate and Advanced) and 0 otherwise.
- COMSK is a dummy variable for computer skill, which takes the value 1 if the computer skill level of individual ith
is “good” or “very good” and 0 otherwise.
- AGE and AGE-squared show the age as a proxy for labor market experience. The age-squared is used to catch
for concavity of potential labor market experience.
- CLER, is a dummy variable for clerical workers, which takes the value 1 if individual ith is a clerical worker and 0
otherwise.
- PROF, is a dummy variable for professional workers, which takes the value 1 if individual ith works as a
professional/expert and 0 otherwise.
- MANAG, is a dummy variable for managerial workers, which takes the value 1 if individual ith is a managerial
worker and 0 otherwise.
- PRIV, and NGO are dummy variables for private firms and NGOs. There are three types of sector/organizations
for the observed workers, the third one is government sector which was defined as the reference group and
excluded from the equation. These two sectors are defined separately.
- PRIV is a dummy variable, which takes 1 if individual ith works in private firms and 0 otherwise.
- NGO is a dummy variable, which takes 1 if individual ith works in NGOs and 0 otherwise.
- SEX is a dummy variable, which takes 1 if individual is male and 0 otherwise (= female).
- MARRIED is a dummy variable, which takes 1 if individual is married and 0 otherwise.

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Economic Return to Schooling in Afghanistan

- Liter 𝜺𝒊 is an error term, assumed to be normally and identically distributed with zero mean and constant
varianceδ2u .

Results

The effect of schooling and other important effective variables on individuals’ earnings has been
described with both descriptive and inferential statistic in order to identify the role of schooling
and other effective factors on the wage of employees and highlight the wage gap.
There are 340 (85%) male and 60 (15%) female workers in the total sample of 400 observations.
Likewise, 23.8% of the observations are single employees and the 76.2% are married employees.
The share of the educated employees who are computer savvy in NGOs, private firms and
government organizations, is respectively 90%, 84% and 59%.
Now prelude to the regression analysis, some important descriptive statistics are highlighted as
follow.

Figure 1 shows that the schooled individuals earn consistently and significantly higher wages than
unschooled ones across sectors. It also indicates that private firms reward education 20% more
than government organizations. Similarly, the NGOs reward education more than both
government and private organizations, which means 89% more than government and 58% more
than private firms. In addition, the wage gap between the schooled and the unschooled groups is
70% in government organizations, 62% in private firms and 110% in NGOs. Thus, the sector
factor is significantly and consistently effective on the individuals’ earnings.

Furthermore, there is a wage gap among schooling levels and gender depicted in figure 2. It
shows that the mean wages consistently increase with the increase of schooling levels. Likewise,
the male workers consistently get higher wages across all levels of schooling. The red curve is
above the blue curve in all levels of schooling, which indicates that the male workers enjoy a
higher income than female workers across schooling levels.

25000 Figure 1: Mean Wage by Schooling & Sector

19665
Mothly mean wage (Afs.)

20000

15000
12445
10416
10000 9366
7685
6147
5000

0
Government Private Firms NGOs
Sector
Source: Field research data (n=400) Unschooled Schooled
Source: Field research data (n=400)

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Economic Return to Schooling in Afghanistan

24000 Figure 2: Wage Gap by Schooling & Gender

20333
21000

18000
18467
Mean Wage (Afs.)
15000 13755

12000
12562
8450
9000 7462 Female
Male
6000
6000 6000
3000

0
Primary Secondary High School Technical/Voc.

Schooling Levels

Source: Field research data (n=400)

To summarize the statistical description of the data regarding the wage differential due to human
capital factors and other effective factors, the following table is depicted as follow.

Table 2: Summary Statistics of Important Variables (Values in Afs.)

Symbol Definitions Government Private NGOs Overall

N Number of observations 100 200 100 400
Mean Mean Mean Mean
W Monthly earnings (wages) 8281.30 10065.00 14515.50 10731.70
Ln W Log of monthly earnings 8.95 9.12 9.50 9.17
Std. D Standard Deviation -0.39 -0.44 -0.40 -0.47

AGE Age in years 33.94 28.92 31.88 30.92

Schooling Levels
UNSCH Unschooled 6146.60 7685.00 9366.00 7720.65
PRIM Primary level of schooling 6500.00 7423.08 - 7357.14
SECD Secondary level of schooling 5733.33 8687.50 - 8359.26
HSCH High school level 10570.45 13397.73 18594.83 13622.65
VOC Vocational/Tec. Level 16000.00 18421.05 21142.86 19.666.67

English Language Skill

NOENGSK No English skill 7200.47 8910.60 10763.79 8903.41
BENGSK Basic English skill 9433.33 11086.96 18777.78 11876.00
INTENGSK Intermediate English skill 10972.22 14388.89 19092.11 14895.45
ADVENGSK Advanced English skill - 19187.50 21107.14 20409.09

Computer Skill
NOCOMSK No computer skill 6688.45 8524.82 10041.82 8433.98
GCOMSK Good computer skill 10054.29 13062.50 19848.21 13825.68
VGCOMSK Very good computer skill 12614.29 16727.27 20205.88 17594.29

Occupation Type

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Economic Return to Schooling in Afghanistan

MANU Manual workers 6565.73 8055.56 10041.82 8178.00

CLER Clerical workers 9658.33 11946.43 18632.35 12797.83
MANAG Managerial workers 9592.31 14314.29 21428.57 14930.65
PROF Professional workers 13011.11 14772.73 20178.57 16532.35

Gender and Marital Status

F Female workers 7536.84 10527.78 14630.43 11153.33
M Male workers 8455.93 10019.23 14481.17 10657.29
MS Married workers 7955.52 10567.83 13884.00 10638.13
MR Single workers 10461.54 8803.51 16410.00 11032.11
Source: Field research data (n=400)

Table 2 indicates that the levels of computer skills and English language skills are consistently
effective on wage differences. It shows that these skills have been more effective on wages paid
by NGOs than private and government organizations. Similarly, the occupation type is another
important effective factor on the individuals’ earnings. It indicates that the mean wage of workers
increases by their position levels, which means the manual, clerical, managerial and professional
workers, respectively, enjoy from monthly wage of 8178.00Afs, 12797.83Afs, 14930.65Afs and
16532.35Afs.
The empirical findings reveal that schooling had a significant effect on individuals’ earnings. The
results of the regression for equation 1 (ln Wi = α + β1 educ𝑖 + β2 age𝑖 + β3 𝑒𝑔𝑒𝑖2 + εi ) estimated
by using the OLS method is reported in table 3 as follow:

Table 3: OLS Estimates of Wage Function for Years of Schooling

(Dependent Variable: Log of Monthly Wage)

Independent Variables Coefficients T-statistic Sig.

(Constant) 7.687 30.947 .000
Years of Schooling 0.053* 18.811 .000
Age 0.074* 4.785 .000
Age2 -0.001* -4.726 .000
R-squared 0.49
Observations 400
Source: Field research data (n = 400) * Significant at 99 percent level.

Table 3 reveals that the years of schooling is statistically significant, with a T value of 18.811, it is
in line with the human capital theory and confirms the significant and positive influence of
schooling on earnings/wages. The estimated coefficient for years of schooling indicates that-
holding other factors constant, one additional year of schooling increases the monthly wage by
5.3 percent. Similarly, the coefficients for age and age2 show the significant effect on wage at the
99% level.

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Economic Return to Schooling in Afghanistan

The result of the regression for equation 2 (entails the schooling levels and other effective factors
on wage) is reported in table 4. The variation column shows the standardized form of coefficients,1
so in the interpretation of the results for equations 2, the variation is used instead of the coefficient.

In table 4, the coefficients of high school and vocational/technical levels are significant at the 99
percent level, which indicates that the economic return of schooling for workers with 12 years of
schooling is 66.7 percent and for workers with 14 years of schooling is 116.6 percent compared
to workers who have not been schooled. In other words, it can be interpreted that individuals who
have completed high school and those who have a vocational degree, respectively, enjoy 66.7%
and 116.6% higher wages compared to those who have not had formal education.
The coefficient for secondary level is 12.7, which shows that this level is less effective on wage.
However, the coefficient for primary level is 4.2 with sig. value of 0.583 which indicates that this
level is effective on wage but statistically not significant (at the 95 percent level).

Table 4: OLS Estimates of Wage Function for schooling levels & other factors
(Dependent Variable: Log of Monthly Wage)

Independent Variables Coefficients Variation T-statistic Sig.

(Constant) 7.967 - 36.322 .000
Schooling
No School (= Reference)
Primary school (6 years) 0.041 4.2 0.55 .583
Secondary school (9 years) 0.120** 12.7 2.068 .039
*
High School (12 years) 0.518 67.9 9.801 .000
*
Vocational/Technical (14 years) 0.777 117.5 11.749 .000
Skills
No Skill (= Reference)
English Language Skill -0.018 -1.8 -0.367 .714
Computer Skill 0.046 4.7 0.846 .398
Sector
Government Sector (= Reference)
Private Firms 0.227* 25.5 6.656 .000
*
NGOs 0.488 62.9 12.887 .000
Occupation Type
Manual Worker (= Reference)
Clerical 0.031 3.1 0.663 .508
Professional/Experts 0.131** 14 2.093 .037
*
Managerial 0.137 14.7 2.805 .005

Sex 0.090** 9.4 2.363 .019

Marital Status 0.098** 10.3 2.456 .015
*
Age 0.035 3.6 2.541 .011
Age square -0.001* -0.1 -2.738 .006

1 Variation in percentage with regards to the reference, is obtained by (exp(𝛽) − 1) ∗ 100.

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Economic Return to Schooling in Afghanistan

R-squared 0.707
Observation 400
Source: Field research data. * Significant at 99 percent level. ** Significant at 95percent level.

Although, the descriptive statistics showed that the level of English language and computer skills
had an observable effect on the wage of employees, the result of the OLS regression shows that
these skills are effective on wage but they are statistically not significant.

Table 4 shows that the employees who work in private firms earn 25.5 percent higher wages than
the employees who work for governmental organizations (the reference group). Similarly, the
employees of NGOs enjoy 62.9 percent higher earning than the government employees.
Likewise, the findings show that the coefficient of gender (sex) is statistically significant at the 95
percent level, which indicates that- holding other factors constant, male workers on average
receive 9.4 percent higher wages compared to female workers. Moreover, the marital status
dummy variable, as a non-human capital factor, is effective on wage differential, which indicates
that married workers earn 10.3 percent higher wages than single workers. The occupation
coefficients show that the employees who are engaged with managerial works in governmental
and non-governmental organizations receive the highest wages compared to the employees who
are engaged in professional, clerical and manual works. Finally, the coefficients for age and age
square show a concave relationship between wages and labor market experience of workers in
Afghanistan. The return on one additional year of experience (age) is 3.6 percent, which indicates
that additional year of age increases the monthly wage of workers by 3.6 percent, however, it
decreases progressively and affects negatively after 59 years of age.

Discussion & Conclusion

This paper estimated the economic return to years and levels of schooling in Afghanistan. It
identified empirically the wage gap among individuals due to schooling factor and other important
factors such as sector, sex, skill and occupation. The empirical findings of this study were in line
with the human capital theory. A large variety of studies in different countries have confirmed that
education improves the work productivity of individuals and increases their earnings over their life
time.

The result of the study revealed a positive return to schooling, as each year of schooling brings
5.3 percent return to wage earners. This result is in line with the results of other developing
countries; particularly it is very close to 7.3 percent which was the rate of return to education in
Pakistan and Iran, the two neighbor countries of Afghanistan. However, it is lower than the
average return of low income countries (11.2%) which was reported by Pascharapoulos.

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Economic Return to Schooling in Afghanistan

Similarly, the empirical findings showed that higher levels of school are associated with higher
earnings because individuals who have completed high school and vocational/technical
education, respectively, earn 67.9 percent and 117.5 percent higher wages compared to
individuals who have not been schooled. This result indicates the applicability of the human capital
theory and the Mincer model for Afghanistan. In addition, the effect of sector and sex is observed
to be large and significant. The sector factor is highly effective on the wage of employees; the
employees of private firms and NGOs, respectively, earn 25.5 percent and 62.9 percent higher
wages than government employees. It confirms and strengthens the researcher’s hypothesis that
the sector factor is highly effective on earnings. Therefore, this remarkable wage gap among
public and private sectors is a clear indication that why most talented and skilled workers have
been attracted to non-governmental organization in Afghanistan. Likewise, the analysis showed
that male workers in average earn 10 percent higher wages than female workers, which is an
indication for a gender gap in the labor market of Afghanistan. In addition, the empirical findings
revealed that the primary level of schooling is statistically insignificant. It demonstrates that the
education degree should be promoted to be significantly effective on the wage.

Since the rate of educated population is low in Afghanistan, the role of education in economic
growth and social welfare is not realized properly in this country. Therefore, the significant effect
of education and other factors on individuals’ earnings explained in this paper will encourage
policy makers and families to invest properly in education field of Afghanistan.

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Economic Return to Schooling in Afghanistan

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Cahuc, P., & Zylberberg, A. (2004). Labor economics. Massachusetts Institute of Technology.
Card, D. (1999). The causal effect of education on earnings. Handbook of labor economics, 3,
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CSO (2016), Afghanistan Statistical Yearbook 2016-17. Kabul, Central Statistics Organization.
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