Investments in the development of human capital : rate of return to investments in tertiary education in Malaysia for the year 2000

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Date
2005-10
Authors
Lim, Ah Kow
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Publisher
Universiti Sains Malaysia
Abstract
Usually, people with higher levels of education receive higher levels of earnings. This conforms to the Human Capital Theory which postulates that higher levels of earnings are earned because of higher productivity resulting from more human capital formed through more education. This makes education an investment item. If indeed education is an investment item, then economists and educationists would surely like to know its profitability as an investment. Generally, this profitability is gauged by using a Cost-Benefits Model to obtain a summary statistic or value known as the rate of return. This measure is estimated by discounting the sum of investment costs of education and the sum of discounted ageearnings stream of the graduate. But, as costs are expended in an earlier time period while the benefits are received over a long period of time, present value discounting need to be applied to the total costs and total benefits at a common point in time. The rate of discount that equates total discounted costs with total discounted benefits is the internal rate of return sought in this study. Rates of return are estimated for fields of studies such as arts, science, computer science, medicine, engineering, accou.'ltancy and law degree programmes. Estimations are made for those working in the civil service and also for those who work the private sector. Generally, the findings indicate that the private rates of return to tertiary education are rewarding compared to non-graduates. Graduates in the field of science from both public universities and private colleges obtain rather high rates of 15% to 20%. Engineering, computer science and accounta11Cy graduates from private colleges are still able to obtain high rates of return. This in turn has attracted many students to private colleges although the costs of education are high. Compared to rates of returns on alternative investments such as bonds and fixed deposits that pay 3% or 4%, the private rates of return to tertiary education are better. The rates range from 12.96% to 20.60% for public university graduates while private college graduates obtain 7.20% for medical graduates to 19.43% for science graduates working in the private sector. Reasons for private college graduates earning lower rates of return include higher costs of education, length of period of study and sector of employment. The social rates of return to all disciplines except medicine, indicate that more social resources can be invested for public tertiary education. The private sector too can expand its programmes especially in the disciplines of science, engineering, accountancy and computer science. Although medical graduates from private medical colleges do not obtain high rates of return, such rates will improve when costs of medical education are reduced with the establishment of more private colleges for medicine. The rate of return estimates are useful in educational and manpower planning by indicating how scarce economic resources can be effectively allocated. At the same time, rate of return analysis would show how financial policies for tertiary education would achieve its objective of social equity.
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Keywords
Human capital
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