Returns To Investment In Education At Diploma Level: A Case Study In Ipoh, Malaysia
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Date
2003-09
Authors
Pei Yee, Ooi
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Abstract
The title of the thesis is Returns to Investment in Education at Diploma Level: A Case
Study in Ipoh, Malaysia. This research covers the basic concept in the field of economics of
education, that is, the human capital in relation to education. Under this concept, education is
viewed as an investment and a form of capital. Therefore, the research problems here that the
researcher wants to answer empirically is the profitability of investing in human capital
particularly in education from the private and social perspectives. It is aimed to determine the
private and social returns to investment in education at diploma level, as well as by diploma
courses such as engineering and business. Further, it aims to examine the relationship between··
education and earnings, as well as to determine the size of earnings differential between a
diploma graduate and a secondary schoolleaver. All these are useful to future schoolleavers,
educational planners as well as policy makers. The conceptual framework is provided by the
human capital concept, a basic framework for analyzing investments in human capital.
This research employed the Internal Rate of Return method (IRR) and the Mincerian
Earnings Function method in determining the returns to investment in education. IRR is a rate
that equates the net present value (NPV) to zero. This is where the discounted benefits of
education are similar to the discounted costs of education. The Mincerian Earnings Function is
a regression model where the log of earnings is regressed on years of schooling, work
experience and work experience squared. The coefficient of years of schooling in the basic
Mincerian Earnings Function reflects the average return to investment in education. Note also,
that the coefficient of years of schooling in the extended Mincerian Earnings Function reflects
the size of earnings differential between the two levels of education. Data for the rates of
return computation were collected through a cross sectional study c-onducted at one single
point in time in Ipoh, Malaysia from February 19, 2003 until May 12, 2003. Ipoh was chosen as a geographical area for the sake of convenience. The main reason is that the researcher was
born in Ipoh and has a well-established business and friendship network in Ipoh. Samples
were selected from those who are now in the labor market working after they have finished
schooling. Total samples were 452, with 284 diploma graduates and 168 secondary school
leavers. Additionally, samples were selected from the economic sectors such as manufacturing,
wholesale trade, finance, insurance and business services. This research employed the network
sampling due to the difficulty in identifying the nature and size of the population.
According to the IRR method, private and social rates of return to diploma level were
12.87% and 1039% respectively, before adjusting for ability and cognitive skills. After some
adjustments on ability and cognitive skills, the new rates of return are somewhat lower. These
private and social rates of return were 9.37% and 7.34% respectively. By diploma courses, the
private and social returns to engineering were higher than business. The unadjusted private and
social rates of return to engineering and business were 14.33% and 11.35% respectively.
However, the adjusted private and social rates of return to engineering and business were
somewhat lower at around 11.01% and 9.17% respectively. Meanwhile, the Mincerian
Earnings Function reported a private rate of return to diploma level of 15% and an average
private rate of return to education of 12%, for one additional year of schooling. This Mincerian
private rate of return of 12% is similar to some Asian countries like Singapore 13.1 %, Japan
13.2%, Korea 13.5% and Thailand 11.5%. To conclude, the findings indicate that education
was significantly and positively related to earnings. In addition, the size of earnings
differential between a diploma graduate and a secondary schoolleaver was 45%.
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Keywords
Finance , Economic aspects