External and private return to education by using instrument variables approach evidence in vietnam with a panel data

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UNIVERSITY OF ECONOMICS ERASMUS UNVERSITY ROTTERDAM HO CHI MINH CITY VIETNAM INSTITUTE OF SOCIAL STUDIES THE NETHERLANDS VIETNAM – THE NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS EXTERNAL AND PRIVATE RETURN TO EDUCATION BY USING OF INSTRUMENT VARIABLE APPROACH: EVIDENCE IN VIETNAM WITH A PANEL DATA SET BY MR LE THANH HUNG MASTER OF ARTS IN DEVELOPMENT ECONOMICS HO CHI MINH CITY, October 2016 UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES HO CHI MINH CITY THE HAGUE VIETNAM THE NETHERLANDS VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS EXTERNAL AND PRIVATE RETURN TO EDUCATION BY USING OF INSTRUMENT VARIABLE APPROACH: EVIDENCE IN VIETNAM WITH A PANEL DATA SET A thesis submitted in partial fulfilment of the requirements for the degree of MASTER OF ARTS IN DEVELOPMENT ECONOMICS By MR LE THANH HUNG Academic Supervisor: PROF NGUYEN TRONG HOAI HO CHI MINH CITY, October 2016 ACKNOWLEDGEMENT To be able to finish this thesis, I have received the great supports from many people Firstly, I would like to express my appreciation and special thanks to Prof Nguyen Trong Hoai, my academic supervisor, who has given me many valuable guidance, advices, and great encouragements for my thesis Secondly, I would like to express my gratitude to Lecturers and Staff from Vietnam – Netherlands Program at University of Economics Ho Chi Minh city Specially, I am indebted to Ph.D Truong Dang Thuy, who gave me valuable support and comments for my thesis I am also grateful to Ph.D Pham Thi Bich Ngoc for her support in Stata’s commands in my thesis Finally, I am indebted to my family and my friends, who gave me the greatest encouragements for my study Page |i DECLARATION I declare that “External and private return to Education by using of Instrument Variable Approach: Evidence in Vietnam with a panel data set.” is my own work This thesis is has not been submitted to any degree or examinations at any other universities In addition, all the using sources are indicated by the completed references P a g e | ii ABSTRACT The combination of Vietnam Household Living Standard Survey and Provincial Statistics Yearbook from 2010 to 2014 provide a great opportunity for estimating the up to date external and private return to education in Vietnam In this paper, the Human Capital Earning Function (Mincer, 1974) and instrument variables are adopted in order to estimate the external and private return to education The analysis suggests that not only one additional schooling year have an impact on individual wage, but the increase in proportion of skilled workers in the labor force also have an influence on the hourly wage of individual P a g e | iii TABLE OF CONTENTS ACKNOWLEDGEMENT i DECLARE ii ABSTRACT .iii TABLE OF CONTENTS iv LIST OF TABLES vi LIST OF FIGURES vii LIST OF ACRONYMS viii Chapter 1: Introduction 1.1 Introduction 1.2 Research objectives 1.3 Research scope 1.4 Structure of paper Chapter 2: Literature review 2.1 Human capital theory 2.2 Returns to education 2.3 External return to education 10 2.4 Chapter remark 12 Chapter 3: Research methodology 14 3.1 Research methods 14 P a g e | iv 3.2 Endogeneity in Wage function 15 3.3 Data sources and measurement 16 3.4 Instrument variables 18 3.5 Additional provincial control variables and interact terms 20 3.6 Data description 21 3.7 Chapter remark 22 Chapter 4: Research results 24 4.1 Overview about Vietnam 24 4.2 Individual earning on individual characteristics 27 4.3 Individual earning on levels of education 28 4.4 Results on estimating returns to education 29 4.5 Returns to education classified by dummy variables 36 4.6 Chapter remark 41 Chapter 5: Main findings and recommendations 43 5.1 Main findings 43 5.2 Policy recommendations 45 5.3 Limitations 46 REFERENCE 47 APPENDIX 50 Page |v LIST OF TABLES Table 3.3 Definitions and unit of individual-level variables 17 Table 3.4 Definitions and unit of provincial level variables 18 Table 3.5 Descriptive statistics for continuous variables .20 Table 3.6 Descriptive statistics for dummy variables 21 Table 4.2.1 Individual earning classified by gender 27 Table 4.2.2 Individual earning classified by marital status 28 Table 4.2.3 Individual earning classified by type of school 28 Table 4.3 Individual earning on levels of education 29 Table 4.4.1 OLS estimate 29 Table 4.4.2 Instrument variables estimate without control variables 31 Table 4.4.3a IV estimate with additional control variables 33 Table 4.4.3b External return to education for levels of education 34 Table 4.5 IV fixed effect with additional control variables for groups of individual’s characteristics 37 Table 4.5a External return to education for female 39 Table 4.5b External return to education for Married = .40 Table 4.5c External return to education for public school 41 P a g e | vi LIST OF FIGURES Figure 2.4: Analytical framework 13 Figure 4.1a: GDP across six key economic regions in Vietnam 2010-2014 25 Figure 4.1b: Educational system in Vietnam 26 P a g e | vii LIST OF ACRONYMS GDP Gross domestic product VHLSS Vietnam Household Living Standard Survey PSY Provincial Statistic Yearbook HCEF Human Capital Earning Function P a g e | viii Table 4.5a External return to education for female Schooling year External return (%) - 12 16 18 22 13.7 9.2 5.6 2.9 -0.7 -2.5 -6.1 For male: The external return to education is not significant, while private return to education is positive significant at p-value < 0.1 The SchYear coefficient is equal 0.163 – 0.007*Educated + 0.0468*HighGDP The man’s private return to education become negative when the proportion of highly educational workers is higher than 23.3% when this man works in the province/city having GDP lower than average In province/city having GDP higher than average, the private return to education of male become negative when the share of skilled worker in this province/city is higher than 30% 4.5.2 By Married (column 1,2 in table 4.5): Interestingly, while the private and external return to education is positive significantly for individual living with husband/wife in period of survey, both two types of return to education are not significant for the remaining part For people living with husband or wife, the Educated coefficient, which is considered as the external return to education, is equal 0.0947 – 0.008*SchYear, while the private return to education is equal 0.189 – 0.008*Educated + 0.0413*HighGDP Table 4.5b helps to express the external return to education for each level of education In details, individual, who is living with husband or wife and not go to school, have an increase in hourly wage at 9.47% when there is one percent increase in the share skilled workers in the labor force The increase in hourly wage is at 5.47%, 2.27% for individual graduating from primary and lower secondary schools, respectively Page | 39 For individual with dummy Married variable equal 1, when there is one percent increase in the share of skilled workers in the local labor force, the hourly wage of individual, graduating from upper secondary, university and having master and doctor certification, decrease at 0.13%, 3.33%, 4.93% and 8.13% respectively Table 4.5b External return to education for Married = Schooling year External return (%) 12 16 18 22 9.47 5.47 2.27 -0.13 -3.33 -4.93 -8.13 About private return to education, the rate is equal 0.2303 – 0.008*Educated for individuals living in provinces/cities with GDP higher than average and 0.189 – 0.008*Educated for individual living in province/cites with GDP lower than average When married individual living in the province/city with high GDP, the hourly wage will decrease when the share of skilled workers in his working province/city is higher than 28.8% In addition, the share of skilled workers is higher than 23.6% will make the private return to education of individual living in provinces/cities having GDP lower than average 4.5.3 By SchType: Due to the domination role of public schools in Vietnam, the observations in the whole sample, who study in public schools, are accounted for 93.25% basing on data description for dummy variables in chapter This may be the results of significantly positive external and private return to education for only individuals studying in public schools The Educated coefficient is equal 0.0927 – 0.009*SchYear, table 4.5c shows Page | 40 Table 4.5c External return to education for public school Schooling year External return (%) 12 16 18 22 9.27 4.77 1.17 -1.53 -5.13 -6.93 -10.53 that the external return to education of individual graduating from public primary schools and lower secondary schools are at 4.77% and 1.17%, while individual not going to school have an increase at 9.27% of hourly wage if the share of skilled workers in local labor market increase one percent However, the external return to education become negative for people graduating from upper secondary and above For instance, individual graduating from public universities would have a decrease of hourly wage at 5.13% when the proportion of highly educational workers increase one percent In addition, SchYear coefficient is equal 0.203 – 0.009*Educated + 0.0465*HighGDP we could say the private return to education of individual living in province/city having GDP higher than average is higher 4.65% than individual living in city/province with GDP lower than 82,875 billion VND In addition, the private return to education of individual living in high-GDP province/cites become negative when the share of skilled workers in labor force is higher than 27.7% and the turning-point of skilled workers’ share for province/city having GDP lower than average is 22.5% 4.6 Chapter remark: In this chapter, the overview of Vietnam in economy and education helps to make an introduction about Vietnam, which is related to the characteristics of whole sample using in the paper The distributions of hourly wage, which is dependent variable in the research, are described by classifying the whole sample in gender, marital status, and type of school The returns to education are estimated on OLS model, then the apply of Page | 41 instrument variables in order to deal with endogeneity of Educated and SchYear Interaction terms are used in the final step of estimating the return rate of education Page | 42 Chapter 5: Main findings and recommendations This chapter includes three parts, including main findings, recommendations, and limitations While the main findings section helps to summarize the results of paper in aiming estimate the relationship between the shares of highly educational workers on the individuals’ hourly wage, the recommendations provides some policies in order to improve Vietnamese performance The final part express the limitations of this paper in estimating the external and private return to education in Vietnam 5.1 Main findings: The main purpose of this paper is up to date in estimating the external and private return to education in Vietnam The combination of Vietnam Household Living Standard Survey from 2010 to 2014 and Provincial Statistics Yearbook in these years creates an interesting opportunity for this paper’s aim The Ordinary Least Squares, Instrument variable Two Stage Least Squares and interact terms are the main methodologies in this paper when adopting the Human Capital Earning Function (Mincer, 1974) According to the results expressing in the previous chapter, the paper states that there is positive external return to education in Vietnamese labor market, which is difference in every educational level However, an increase one percent in the share of trained workers only makes the hourly wage of individuals who graduates from lower secondary and below For instance, people who never go to school get the highest external return to education at 7.7% and respectively at 3.7% and 0.5% for primary graduates and lower secondary graduates Due to the supply effect in labor market, for people who graduates from upper secondary and above, the external return to education becomes negative significant at (-1.9%) for people has schooling year at 12, at (-5.1%) for people graduating from universities, at (-6.7%) for master degree and decreases to (-9.9%) for Doctoral Certification holders The results from this paper have the similar argument with Fan and Ma (2012) about the external return to education low and high educational Page | 43 workers Fan and Ma (2012) stated that the external return to education is strong positive significantly for low-education workers at 17.4% while, the external rate of return for Chinese graduating from college and above is not significant when using IV fixed-effect and at (-4.5%) when dropping out instrument variable The private return to education is an additional reward in this paper This rate of return is based on two interact terms, including the pressure of competition and economic development in the province/city where individual works The first interact term is between dummy variable HighGDP (province/city having GDP higher the average = 1) and schooling year (SchYearHighGDP), which helps to describe the differences of educational level across the development level of provinces/cites The second interaction variable belongs to share of highly educational workers in the labor market and schooling year (EduSchYear) This interact term is added in order to express the differences of skilled workers’ supply on the education of individual From estimating the whole sample, the private return to education is equal 0.184 – 0.008*Educated + 0.037*HighGDP In other words, when the share of skilled workers in the province/city having GDP higher than average increase one percent, an additional schooling year makes the hourly wage of individual increase 21.3% This rate of return is reasonable when compared to the private return of Asian at 20% from Psacharopoulos and Patrinos (2004) Comparing to Tinh (2011), who found the private return to education is about 17% on average when using Vietnam data set in 2008, this paper expresses an improvement in schooling benefit from 2008 to 2014 in Vietnam For instance, the private return to people working in cites or provinces having GDP higher than 82,875 billion VND will become negative when the share of highly educational workers is higher than 27.65% While the turning point to negative value of SchYear in city or province, whose GDP is lower than average, is higher than 23% of highly educational labor force In addition, the results from classifying the whole sample by gender, marital status, and type of school express some interesting findings The external return to education is only Page | 44 significant for female living with husband and studying in public school For individual living with husband/wife, an increase in share of skilled workers in labor market, the hourly of this person is increase 9.47% for who not go to school, 2.27% for who graduating from lower secondary school and this rate of return become negative when this person graduating from upper secondary school and above For female, the external return to education is higher than estimating whole sample (13.7% compared to 7.7%) for who not go to school While whole sample have external return to education at (-9.9%) for individual have Doctor Certification, one percent increased in share of skilled labor force make the hourly wage decrease 6.1% for female, who is Doctor Certificate holder About the private return to education, an additional year of schooling have a positive benefit for male when the share of skilled worker is not greater than 23.3% and 22.4% for female 5.2 Policy Recommendations: According to the main findings and some abstractions discussing in the previous sections, this paper suggests some recommendations in the following: - The province or city with better economic performance and living standard often attract many workers, which make the return to schooling decrease and could become negative Therefore, the policies, which help to arrange the distribution of labor force in city or province to balance the proportion of highly educational worker across the country, are necessary - The negative external return to education could express the lack of high-skillrequire jobs in the economy In order to improve this issue, some policies helps to increase the demand for highly skilled labor force are very important - The external return to education has the highest value for people never going to school and be positive for the groups of people graduating from lower secondary Page | 45 and below This implies that investments in the primary and lower secondary schools bring many benefits for human capital in our nation - There should be some polices that encourage people improve the educational level, especially illiterates 5.3 Limitations: This paper deals with some abstractions, which may not explain the educational effects on the individuals’ wage The first issue comes from the interviewees in the Vietnam Household Living Standard Survey This survey is conducted in the regions where people usually participate in the economics by farming activities Farming activities does not require a good or high certification in education and it is very difficult to collect the information about the wage that these people get from their jobs In addition, Vietnam has a great gap between 64 provinces/cites According to Provincial Statistics Yearbook (2014), there are only five provinces/cities with GDP higher than 100,000 billion VND and the highest GDP is over 650,000 billion VND for Ho Chi Minh City Due to this difference, the returns to education varies and fluctuates widely The lack of empirical for external return to education is also a difficulty, then the issues in this type of estimating about the model and approaches is not provided many experiences in dealing with them Page | 46 REFERENCE Acemoglu, D., & Angrist, J (2001) How large are human-capital externalities? Evidence from compulsory-schooling laws In NBER Macroeconomics Annual 2000, Volume 15 (pp 9-74) MIT Press Altonji, J G., & Card, D (1991) The effects of immigration on the labor market outcomes of less-skilled natives In Immigration, trade, and the labor market (pp 201234) University of Chicago Press Bakis, O., Davutyan, N., Levent, H., & Polat, S (2010, April) External returns to higher education in Turkey In Economic Research Forum Working Paper Series (No 517) Barro, R J (1991) A cross-country study of growth, saving, and government In National saving and economic performance (pp 271-304) University of Chicago Press Becker, G S (1962) Investment in human capital: A theoretical analysis The journal of political economy, 9-49 Becker, G M., DeGroot, M H., & Marschak, J (1964) Measuring utility by a single‐response sequential method Behavioral science, 9(3), 226-232 Ben-Porath, Y (1967) The production of human capital and the life cycle of earnings The Journal of Political Economy, 352-365 Canton, E (2007) Social returns to education: Macro-evidence De Economist, 155(4), 449-468 Doan, T T (2011) Labour market returns to higher education in Vietnam Economics Discussion Paper, (2011-4) Fan, W., & Ma, Y (2012) Estimating the External Returns to Education: Evidence from China Page | 47 Katz, L F., & Murphy, K M (1991) Changes in relative wages, 1963-1987: Supply and demand factors (No w3927) National Bureau of Economic Research Le, P V (2014) More Schooling Is Not Always Better: Evidence from an Instrumental Variables Approach to Educational Reform in Vietnam Lindahl, M., & Krueger, A B (2001) Education for Growth: Why and for Whom? Journal of Economic Literature, 39(4), 1101-1136 Liu, Z (2007) The external returns to education: Evidence from Chinese cities Journal of Urban Economics, 61(3), 542-564 Lucas, R E (1988) On the mechanics of economic development Journal of monetary economics, 22(1), 3-42 Mincer, J (1974) Schooling, Experience, and Earnings Human Behavior & Social Institutions No Moock, P R., Patrinos, H A., & Venkataraman, M (2003) Education and earnings in a transition economy: the case of Vietnam Economics of Education Review, 22(5), 503510 Moretti, E (2004) Estimating the social return to higher education: evidence from longitudinal and repeated cross-sectional data Journal of econometrics,121(1), 175212 Nazier, H (2013) Higher Education Externalities in Egyptian Labor Markets.Advances in Management and Applied Economics, 3(2), 193 Nelson, R R., & Phelps, E S (1966) Investment in humans, technological diffusion, and economic growth The American economic review, 56(1/2), 69-75 Phan, D., & Coxhead, I (2013) Long-run costs of piecemeal reform: wage inequality and returns to education in Vietnam Journal of Comparative Economics, 41(4), 11061122 Page | 48 Rauch, J E (1991) Productivity gains from geographic concentration of human capital: evidence from the cities (No w3905) National Bureau of Economic Research Psacharopoulos, G., & Patrinos*, H A (2004) Returns to investment in education: a further update Education economics, 12(2), 111-134 Schultz, T W (1961) Investment in human capital The American economic review, 117 Smith, A (1776) The wealth ofnations New York: The Modern Library Smith, A., & Nicholson, J S (1887) An Inquiry Into the Nature and Causes of the Wealth of Nations T Nelson and Sons Stock, J H., & Yogo, M (2005) Testing for weak instruments in linear IV regression Identification and inference for econometric models: Essays in honor of Thomas Rothenberg Strawinski, P (2008) Changes in return to higher education in Poland 19982005 Available at SSRN 1159044 Summers, R., & Heston, A (1988) A new set of international comparisons of real product and price levels estimates for 130 countries, 1950–1985 Review of income and wealth, 34(1), 1-25 Tien, N D (2014) An analysis of labour market returns to education in Vietnam: evidence from the national labour force survey 2012 International Training Centre of the International Labour Organization Working Paper, Wang, Q., & Liu, N C (2014) Higher education research institutes in Chinese universities Studies in Higher Education, 39(8), 1488-1498 Page | 49 APPENDIX Appendix 1: Hausman test for OLS estimate Appendix 2: Hausman test for IV estimate without addional control variables Page | 50 Appendix 3: Hausman test for IV estimate with additional control variables Appendix 4: Tests for Instrument variables in IV estimate with additional control variables Page | 51 Due to the collinear issue, the SchHead instrument variable is dropped out of IV estimate, hence two endogenous variables (Educated and SchYear) are instrumented by NumLec, ShPHo and StuLecRatio The following tests are the test of validity for the remaining instrument variables In the underidentification test, p-value = 0.000, which means that the instruments variables are relevance to the endogenous variables While, the weak identification test provides the critical value of 16.27, which is higher than 10% maximal IV size for the case of two endogenous and three instrument variables, it means the instruments variable are not weak In the overidentification test of all instruments, p-value is higher than 0.05, which implies that the set of instrument variables are exogenous Combining three of tests in Appendix 4, the set of instrument variables, including NumLec, StuLecRatio and ShPho, is valid Appendix 5: First-stage regression of Educated variable In the first-stage regression of Educated variable, the two instrument variables StuLecRatio and ShPHo have a significant impact on this endogenous variable Page | 52 Appendix 6: First-stage regression of SchYear variable There are two instruments variables, including NumLec and ShPHo have a very strong relevance to SchYear, while the StuLecRatio does not have a significant influence on this endogenous variable Page | 53 ... education in a different way, such as using longitudinal data instead of cross-sectional data and estimating in both urban and rural areas in China In this paper, Fan and Ma use an instrument variable,... date external and private return to education in Vietnam In this paper, the Human Capital Earning Function (Mincer, 1974) and instrument variables are adopted in order to estimate the external and. .. research in estimating the up-todate private and external return to education in Vietnam For private return to education, the individual level data is used, while external return to education
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