The value of education in low skill economies: some evidence from Kenyan and Tanzanian Manufacturing
In depth
Summary of results
Table 6: Control Function Estimates: Kenya 2000 and Tanzania 2001
| Kenya | Tanzania | |||
| [1] Young | [2] Old | [3] Young | [4] Old | |
| Education | -0.060 | 0.113 | 0.106 | 0.022 |
| (0.169) | (0.052)* | (0.063)+ | (0.038) | |
| max(0,EDUC-7) | 0.202 | 0.109 | 0.050 | 0.115 |
| (0.182) | (0.060)+ | (0.086) | (0.049)* | |
| max(0,EDUC-10) | 0.154 | -0.035 | -0.280 | -0.081 |
| (0.098) | (0.086) | (0.189) | (0.121) | |
| max(0,EDUC-12) | 0.099 | 0.313 | 0.463 | 0.258 |
| (0.099) | (0.098)** | (0.196)* | (0.181) | |
| Education earnings profile linear (p-val.) | 0.00 | 0.00 | 0.06 | 0.00 |
| EXCRES (p-value)(1) | 0.00 | 0.00 | 0.00 | 0.00 |
| RETHET (p-value)(2) | 0.16 | 0.60 | 0.95 | 0.61 |
| EXOGEN (p-value)(3) | 0.00 | 0.00 | 0.35 | 0.58 |
| Observations | 371 | 579 | 227 | 432 |
OLS and control function estimates of the earnings education profile for Kenya:
Summary of Results
- No evidence that the returns to education are correlated with unobserved ability.
- Kenya: convexity gets more pronounced as a result of treating education as endogenous. Thus, OLS seems to underestimate the differences in marginal returns between those with little education and those with much.
- Tanzania: effects of controlling for endogeneity of education are smaller. Control function estimates similar to OLS, and we can accept exogeneity.
- Thus the main conclusion here: Our finding that returns to education are convex is not altered by treating education as an endogenous variable.
Returns rise when education is endogenous – why?
- A common result in the empirical literature is that the estimated returns to education increase as a result of treating education as an endogenous variable. We obtain a similar result. This appears inconsistent with the idea that unobserved ability leads to bias. Why might this happen?
- Education is measured with error => OLS downward biased.
- We are identifying a local average treatment effect (LATE). If there is heterogeneity in the returns to education, and the instruments alter the behaviour mainly on those with high returns, then treating education as an endogenous variable may lead to higher estimates.
- Methodological problems.
- Maybe the instruments are invalid. However compared to most other studies of returns to education in Africa we would argue that our data contain what would seem relatively good instruments.
- Another possibility is that sample selectivity plays a role. In general it is hard to sign the nature of selectivity bias within our modelling framework. However, if the selectivity equation is of the form
the control function will yield consistent estimates under certain assumptions that have already been discussed. OLS would be biased downward if the selectivity mechanism is relatively strong.
Given the information available, we cannot determine whether there is support for this and we leave it for future research to probe these issues further.