<html><head /> <body> <META http-equiv="Content-Type" content="text/html; charset=UTF-16"><title>The Fruits of Learning</title><meta name="keywords" content="education,benefits,cooperation,development,economic,economy,enterprise,ghana,ghanaian,jones,labour,learning,market,money,oecd,patricia,pay,program,programme,regional,rped,school,schooling,wages,wealth,work,"><table style="font-family:Verdana; font-size:larger; " align="center" border="0" width="50%"><tbody><tr> <td style="background-color:silver; border-color:white; border-left-style:none; border-style:none; " width="730"><span style="font-family:Verdana; font-size:larger; ">The Fruits of Learning</span></td> </tr> <tr> </tr> </tbody></table><br><table style="font-family:Verdana; font-size:medium; " align="center" bgcolor="white" border="0" width="50%"><tbody><tr> <td height="131" width="669"><span style="font-family:Verdana; font-size:x-small;"><strong>Editors Introduction</strong></span><span style="font-family:Verdana; "></span><span style="font-family:Verdana; font-size:x-small; "> What economic benefits does education really bring? And are educated workers more productive? Patricia Jones, a member of the Labour Markets programme at the LSE, analyses data from Ghana and reports on the dynamic between education, wage and market.</span><br><br><span style="font-family:Verdana; font-size:x-small; ">Education is widely believed to play an important role in economic development. Countries with better-educated workforces tend to have higher incomes, less poverty and slower rates of population growth than those with less well educated workforces. These are attractive goals for developing countries, and in pursuit of them they spend, on average, about 10 percent of their national income on education. One reason why public policy-makers are willing to invest so much in education is because they believe that education makes workers more productive. But are they right?</span><br><br><span style="font-size:x-small;"><strong>Linking education and productivity</strong></span><br><span style="font-family:Verdana; font-size:x-small; ">Since the early 1970s much research has been devoted to measuring what economists call the returns to schooling, that is the proportional change in earnings which comes from one additional year of schooling. There is now overwhelming evidence that education and earnings are closely linked. Workers in low-income countries, for example, earn just over 11 percent more for each additional year they spend at school. Similarly, workers who have completed primary school can expect to earn 35 percent more than those with no formal schooling.</span><br><br><span style="font-family:Verdana; font-size:x-small; ">But while there is little doubt that more educated workers are paid higher wages, it is not so clear whether they are also more productive. The first step towards answering this question would be to determine whether firms actually pay workers according to their productivity. Easier said than done, however. Finding data which provide information both about the wages of individual workers and about how much they contribute to a firm's output is next to impossible. But there is a unique set of data from Ghana which does just that: it combines information on individual workers with information on the firms where they are employed. The figures come from a survey of 200 manufacturing firms organized under the World Bank's Regional Programme for Enterprise Development (RPED) and were collected during the summers of 1992, 1993 and 1994.</span><br><br><span style="font-size:x-small;"><strong>The evidence from Ghana</strong></span><br><span style="font-family:Verdana; font-size:x-small; ">The data collected are extremely rich for an industrial survey and provide numerous indicators of how firms in Ghana have performed since the early 1990s. Most important, these data also include information on a sub-sample of workers employed by the firms in the RPED sample. Up to 20 workers were interviewed from each firm. While this number may seem small by developed country standards, the average size of a firm in the RPED sample is only 18: in other words, the sub-sample could often include all workers employed by the firm. Workers who were interviewed for the survey were asked about their educational background, work experience, on-the-job training, wages, benefits and numerous other personal characteristics.</span><br><br><span style="font-family:Verdana; font-size:x-small; ">The World Bank data enabled us to establish, first of all, whether educated workers in Ghana are more productive than those with no formal schooling. We found strong evidence that, in the Ghanaian manufacturing sector, the more educated the worker, the more productive they are. Workers with secondary schooling, for example, are approximately 46 percent more productive than workers with no formal schooling. Specifically, a one-year increase in the average level of education within a firm is associated with a 7 percent rise in worker productivity. Remarkably, this rise in labour productivity is almost identical to the estimated returns to schooling for manufacturing workers in the RPED sample. The average Ghanaian worker receives a 7.1 percent pay increase for each additional year of education acquired.</span><br><br><span style="font-family:Verdana; font-size:x-small; ">We also found clear evidence that this productivity improvement holds between groups of workers with different levels of education: with those workers with higher levels of education having higher levels of productivity. Workers who completed tertiary education are approximately 25 percent more productive than those who only went as far as secondary school.</span><br><br><span style="font-family:Verdana; font-size:x-small; ">The richness of the RPED data meant we could also investigate the value of vocational training. In Ghana vocational training is run almost entirely outside the formal educational system. In 1991 there were approximately 1,100 vocational schools, of which 160 were public, 250 were private and about 700 were unregistered, private institutions. More than 95 percent of the 634,233 students who chose to acquire vocational training chose private schools run entirely outside the public school system. So it is worth asking whether these schools are making a significant contribution to Ghana's national income by raising the quality of the labour.</span><br><br><span style="font-family:Verdana; font-size:x-small; ">Again, we found that the answer is yes: vocational training in Ghana does significantly raise the productivity of manufacturing workers. On average, the productivity of workers who have acquired vocational training qualifications is between 72 and 78 percentage points higher than workers with no formal schooling. These results are striking and encouraging, given the current controversy over the usefulness of vocational training in developing countries.</span><br><br><span style="font-size:x-small;"><strong>Do the workers benefit?</strong></span><br><span style="font-family:Verdana; font-size:x-small; ">One of the most consistent results in applied economics is the very large returns to educational investments. On average, workers in Organisation of Economic Co-operation and Development (OECD) countries gain approximately 7 percent in earnings for every additional year of schooling they acquire. The payoff to educational investments is even greater for workers who work in developing countries. Workers in sub-Saharan Africa gain 13 percent, while workers in Latin America and the Caribbean, and Asia (non-OECD) gain 12 percent and 10 percent, respectively. But what do these returns mean? Much controversy has arisen over how to interpret the returns to schooling estimated by standard econometric techniques. In particular, researchers have questioned whether the estimated returns reflect the true productivity-enhancing effects of education or whether they simply reflect other factors, like ability, which closely match a worker's level of education.</span><br><br><span style="font-family:Verdana; font-size:x-small; ">While there is a growing consensus that such problems do not significantly affect the estimated returns to education for workers in OECD countries, there is still a great deal of scepticism over the accuracy of such estimates for workers in developing countries. In particular, sceptics have criticised the usefulness of estimated returns to schooling in countries where a majority of the labour force does not earn wages but instead makes a living by non-wage activities like trading in goods or subsistence farming. In our study, we cannot resolve this issue, but we have found new evidence on the extent to which the estimated returns to schooling for workers in the manufacturing sector of Ghana reflect real differences in the productivity of these workers.</span><br><br><span style="font-family:Verdana; font-size:x-small; ">Over 25 years ago, Jacob Mincer (in 1973) demonstrated a method for estimating the returns to schooling: that is, the proportional change in wages associated with one additional year of education. We used his model to estimate the private returns to schooling for Ghanaian workers in the manufacturing sector. The RPED data reveal that there are large monetary rewards to becoming educated in Ghana. Workers with secondary schooling are paid nearly 30percent more than workers with no formal schooling. Similarly, workers with secondary schooling are paid more than 25 percent higher wages than workers who left school after primary education. The greatest jump in wages, however, occurs for workers who have completed tertiary education. These workers earn approximately 35 percent more than workers who left school after secondary education. In other words, educated workers are not only more productive than workers with no formal schooling: they also earn higher wages.</span><br><br><span style="font-size:x-small;"><strong>Are Ghanaian wages competitive?</strong></span><br><span style="font-family:Verdana; font-size:x-small; ">We decided to go even further in our inquiry, by trying to <A HREF="1929_table1.htm" TARGET="_blank"> establish whether firms pay competitive wages:</A> that is, wages that reflect how much the worker contributes to firm output. Although this assumption forms a crucial cornerstone of microeconomic theory, there is little empirical evidence to support its validity, and none from a developing country. Indeed it is often assumed that firms in poor countries operate under a different set of rules to those in rich countries. Our analysis, however, provides strong evidence that Ghanaian firms, at least those in the manufacturing sector, do pay competitive wages and therefore act in much the same manner as manufacturing firms in the developed world.</span><br><br><span style="font-family:Verdana; font-size:x-small; ">We first needed to determine whether firms actually pay workers according to their productivity. While standard economic theory assumes this to be the case, a number of competing theories of wage determination present counter arguments as to why it may be optimal for firms not to pay competitive wages. They may, for example, find it profitable to pay workers lower wage rates when the workers are in training or relatively young. In addition, it may take firms some time to assess the productivity of new workers, resulting in new recruits being paid wages which are either higher or lower than the value of the goods and services which they produce. Any of these scenarios could result in a differential between the value of wages a worker receives and the value of output that he or she produces.</span><br><br><span style="font-family:Verdana; font-size:x-small; ">Only empirical research can resolve the issue of how firms set wages. Unfortunately, little research has been carried out on this issue because of a lack of basic data on firms' wage-setting practices. To assess whether workers are paid the value of their output, one needs information on both the level of workers' wages and the exact value of what they produce. Collecting such data is not easy, given the problems involved in most business environments with measuring the output of any single individual. The data we had for Ghana, however, provided information both on the education of workers in each firm and the average value of output produced by those workers. With this information we are able to estimate how much workers at each level of education contribute to firm output using a technique known as production function analysis.</span><br><br><span style="font-family:Verdana; font-size:x-small; ">It is often assumed that firms in poor countries are less competitive than firms in rich countries. One way of assessing the competitive nature of firms is to determine whether or not they pay their workers competitive wages. In perfectly competitive product and labour markets, firms that do not pay competitive wages will eventually go out of business because they will be unable to compete with firms that do pay competitive wages. To find out what Ghanaian firms do, we compared the results obtained in the earnings analysis to those obtained in the production function analysis.</span><br><br><span style="font-family:Verdana; font-size:x-small; ">From the earnings analysis we derive estimates of the private returns to schooling: that is, the proportional change in earnings associated with different levels of schooling. Likewise, from the production function analysis we obtain estimates of the average rise in productivity associated with different levels of schooling. Theoretically, the two sets of results should be identical when firms pay workers competitive wages. The table linked to earlier shows that they are indeed very similar. For example, workers with secondary schooling earn 56 percent more and produce 54 percent more than workers with no formal schooling. Likewise, workers with tertiary schooling earn 91 percent more and produce 80 percent more than workers with no formal schooling. (This gap is not so wide as it first appears.)</span><br><br><span style="font-size:x-small;"><strong>A flourishing labour market</strong></span><br><span style="font-family:Verdana; font-size:x-small; ">Our findings unequivocally show the importance of education in the Ghanaian manufacturing sector. They also show that the Ghanaian labour market works remarkably well, even by developed-country standards, with clear evidence to suggest that firms pay their workers competitive wages.</span><br><br><span style="font-family:Verdana; font-size:x-small; ">Perhaps most important, though, our results suggest that the estimated returns to schooling based on Mincer's model provide a relatively good estimate of the productivity-enhancing effects of education (at least, for workers in the manufacturing sector). The clear lesson for public policymakers, who often rely on such estimates when judging the value of different educational investments, is that these estimates reflect increases in productivity as well as earnings. In Ghana, at least, education pays handsome dividends: for workers, firms and the state.</span><br> <br><br> <span style="font-family:Verdana; font-size:x-small; font-style:italic; ">This article was taken from CentrePiece magazine, published by the Centre for Economic Performance at the London School of Economics and Political Science. </span></td> </tr> </tbody></table> </body></html>