UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES HO CHI MINH CITY THE HAGUE VIETNAM THE NETHERLANDS VIETNAM - THE NETHERLANDS PROJECT FOR M.A IN DEVELOPMENT ECONOMICS THE IMPACTS OF EDUCATION ON EARNINGS IN THE CASE OF VIETNAM BY NGUYEN XUAN CUONG MASTER OF ARTS IN DEVELOPMENT ECONOMICS HO CHI MINH CITY, NOVEMBER 2008 CHAPTER I: INTRODUCTION 1.1 Introduction 1.2 Problem statements 1.3 Research objectives 1.4 Research questions 1.5 Research hypothesis 1.6 Data and methodology Thesis structure CHAPTER II: LITERATURE REVIEW 2.1 Definition 2.2 Theoretical framework 2.2.1 Mincer's Early Work on experience, 1958 2.2.2 The Schooling- Earning Function 2.2.3 Theory of human capital 10 Empirical studies 12 2.4 Comments on the theories and empirical studies 15 2.5 Modeling 16 CHAPTER III: ECONOMIC, EDUCATION AND LABOUR MARKET IN VIETNAM 3.1 Economic in Transition 17 3.2 Population and labor force 18 3.3 Education achievements 21 3.4 Education expenditure 21 3.5 Employment and income 22 3.5.1 Employment 22 3.5.2 Incotne 23 3.6 Factors affect on earnings 25 3.6.1 Education 26 3.6.2 Experience 26 6.3 Gender 28 3.6 Region 28 3.6 Economic sectors 28 CHAPTER IV: DATA AND METHODOLOGY 4.1 Statistic analysis 29 4.2 Regression model of earning function 32 4.3 Regression results 35 4.4 Estimate coefficients 35 4.4.1 Gender disparity in returns to education 40 4.4.2 Economic sector disparity in returns to education 42 4.4.3 Regional disparity in returns to education 44 CHAPTER V: POLICY IMPLICATIONS AND CONCLUSIONS 5.1 Conclusions 46 5.2 Recommendations 47 5.2.1 Recommendations for employees 47 5.2.2 Recommendations for policy makers 48 5.3 Limitations and areas for further research 48 LIST OFT ABLES Table 1: Vietnamese's population 19 Table 2: Literacy of population age 15 and over by area, region have certificate 20 Table 3: School enrollment trend in Vietnam 2000 - 2004 21 Table 4: The proportion education expenditure in GOP 2000- 2005 22 Table 5: Education expenditure of Vietnam comparing with other countries 22 Table 6: Monthly average income per employee in local state sector at Current prices by region (thousand VND) 25 Table 7: Descriptive statistic 32 Table 8: Average earnings by education Level by Region and Sex 32 Table 9: Description variables used in the model 34 Table 10: Vietnam Earning function Table 11: Vietnam Extended earning function oo oo oo ooooOOOOooooOOOOooooooOOOOoo ooooooooooooooooooooooooooooooooooooooooooooooooooo 38 38 Table 12: Vietnam: Earnings functions by Gender 41 Table 13: Vietnam: Extended Earnings functions by Gender 00 00 00 00 00 00 42 Table 14: Vietnam: Earnings functions by sector of employment (both sexes) 43 Table 15: Vietnam extended earning function by economic sector 43 Table 16: Vietnam: Earnings function by Region oo oo ooooOooooooooooooooooooooooooo Table 17: Vietnam: Extended earnings function by Region 00 45 45 The impacts of education on earnings In the case of Vietnam ABSTRACT The labor market, earnings and the return to education have been strongly impacted after Vietnam transiting into the market economy from planned economy especial since the Doi Moi policy was carried out To exam the impacts, in this paper we attempt to analyze the returns to education on earnings in 2004 by analyzing the monetary benefits of schooling in Vietnam Our estimates demonstrate that there is increasing returns of earning on schooling which consistent with human capital theory and our observation to Vietnam labor market · CHAPTER I: INTRODUCTION 1.1 INTRODUCTION The human capital theory views earnings of a \vorkcr as returns to his or her knowledge capital that have developed through years of schooling and work experience Early works of Becker and Chis,vick (Becker and Chiswick 1966) laid the foundation of this literature and later Mincer (Mincer 1974) proposed an empirical approach to distinguish the contribution of schooling and experience in wage earnings The well-known model of Mincer is "Human capital earnings function; include the log of individual earnings as the explained variables and schooling and experience are as explanatory variables Recent studies of education and earning were almost embedded in the framework of Mincer and combined with different contexts with additional important of the household and community characteristics institutional f~tctors and other observable attributes such as gender ~ economic sectors regions Card (Card 1999) survey the literature on the causal relationship between education and earning This Paper focuses on Vietnam Since Vietnam has successful in economic reform when the economy was transfen-cd from centrally planned to market economy in 1996, the economic transition has led to certain issues in the labor market, education was dctennined important in earnings, the higher the level of education one get, the higher is that person receives starting salary and the steeper the rise in earning during working life In centrally planned economics this relation was limited, in Lao people's democratic Republic (Phanhpakit and Education and Earnings in Lao PDR 2006) or in China (Xie and Human 1996) but they ten to increase as market economy such as in Hong Kong (Tony Chan, 1996) and Czech Republic and Slovakia (Chase 1998) This paper examines the returns to education in Vietnam on the basis of earnings data were collected by Vietnam Living standard Survey in the year 2004 (VLSS 2004), It is to attempted to estimate differential returns to schooling for Vietnamese, male and female, rural and urban areas and also between the public and private sector It is hoped to provide a bench mark to examine the effects of market liberalization and education reform In Vietnam 1.2 Problem statements Since 1996, from the centralized planning economy changed to market oriented economy, Vietnam has a strong development with more openness and further integrated into the World economy, Vietnam has strong integration into the global economy, exchanging goods, services, Capitals, technologies have increased rapidly and strongly leads to change Vietnam's society and economy In the year 2006 Vietnam officially became to the World Trade Organization member (WTO) that helped to create more new opportunities to promote export goods and services which Vietnam has advantages, this circumstance helped Vietnam absorbs Foreign Direct Investment (FDI) especial in capital and technologies With the integration into the World economy, Vietnam has more chances to involve in the international labor division process, the sector which Vietnam has competitive advantages According to integration to the World economy, Vietnamese have chances to access to advanced technologies and modem management techniques with increasing labor productivity and increasing wages Accompany with that more challenges face low skilled workers; lower earnings, since the gape of earning between skilled and unskilled are bigger 1.3 Research objectives The object of this studying is aimed to exam the impact of education on earnings during the transition period, and it is also aimed to identify difference of educations impact between gender, economic sectors, and regions To get these objects, the rates of returns to education instrument and data which survey in the year 2004 are used Although, there were many previous researches have mentioned about the education and earnings in Vietnam, But each research has difference interpretations which based on the characteristics of the economy at each previous This research focuses on the impact of education on earnings in the case Vietnam has almost moved to market economy and integrated the World economy Moreover, the research focuses on the following objectives: To analyze the necessary or the important of education, especially higher education on the economy, and identify what the factors affect earnings most strongly To evaluate present quality of Vietnam's education as well as how much education satisfies the labor market 1.4 Research questions From the objects of the research have mentioned above, the main questions could be made: Do education levels significantly determine earnings of wage earners? What factors affect on wage earners, such as; gender, Region, Economic sector and experience? 1.5 Research hypothesis Education has positive relationship with earnings Experience has positive relationship with earnings Male has higher earnings than female Working in urban earn higher than in rural 1.6 Data and methodology Most of data is collected from secondary Vietnam Living Standard Survey 2004 The research method is used both descriptive and multivariate analysis In the multivariate analysis an econometric technique will be applied, and the basic of human capital earnings functions by Mincer is used to calculate the rate of return to education Sampling frame will be created from VLSS database Thesis structure Thesis is organized into five chapters The first Chapter is introduction, second chapter is overview of human capital theories and empirical studies, the third chapter is described briefly Vietnam economy, population, employment and education, and the fourth chapter mentions the methodology of study and regression model of the impact of education on earnings and describes variables and data, Chapter five including collusions which based on the results of the regression and mentions some appropriate solution to the authorities with concerning on education CHAPTER II: LITERATURE REVIEW 2.1 Definition 2.1.1 Income: '"Income refers to all cash inflow streams to an individual from all sources" (Tony Chan, Stephanie Kent, Sum Lam, Shirley Li, ECON 374 Hong Kong Economy Term Paper) 2.1.2 Wage: "Wage refers to the monthly or yearly compensation from her/his employment'' (Tony Chan, Stephanie Kent, Sum Lam, Shirley Li, ECON 374 Hong Kong Economy Term Paper) 2.1.3 Earnings: "Earnings refers to the compensation per unit labor input, or, m more familiar words, the ability an individual can earns using a fixed amount of labor (Tony Chan, Stephanie Kent, Sum Lam, Shirley Li, ECON 374 Hong Kong Economy Term Paper) It is the best estimated to the productivity of labor and we will take this denotation throughout our paper" 2.1.4 "Education: is fundamental to enhancing the quality of human life and ensuring social and economic progress'' (Micheal P Todaro, Stepphen C Smith, Economic Development, Eighth Edition) 2.1.5 Human capital: "Productive investments embodied in human persons This includes skills, abilities, ideals, and health resulting from expenditures on education, on thejob-training programs, and medical care" (Becker, 1993) 2.2 Theoretical framework There are many different theories of the education and earning, each theory has different interpretations of different variables but most theories was built around a core model of returns to education or human capital earnings function, different earnings model are introduce as followings: 2.2.1 Mincer's Early Work on experience Mincer introduced "Investment in Human capital and Personal Distribution" in 1958, this study is one of the early theory studied the effect of labor market experience or on the-job-training on the determination and distribution of earnings Mincer's model ... 45 45 The impacts of education on earnings In the case of Vietnam ABSTRACT The labor market, earnings and the return to education have been strongly impacted after Vietnam transiting into the market... distinguish the contribution of schooling and experience in wage earnings The well-known model of Mincer is "Human capital earnings function; include the log of individual earnings as the explained... training, the rate of return from on -the- job training and the implications of on -the- job training for the distribution of earnings Here he noted explicitly that earning profiles imply a decline