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
Journal Title
Journal ISSN
Volume Title
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.
Description
Keywords
Human capital