Externalities of Colleagues’ Human Capital Accumulation and Individual Wages: Empirical Evidence from the Malaysian Service Sector

Abstract

The aim of this study is to examine the extent to which colleagues’ human capital accumulation (education, work experience and training) had an impact on individuals’ earnings in the service sector in Malaysia. The study employed data from the 2007 Productivity Investment Climate Survey (PICS) and the colleagues’ human capital accumulation was measured using information from both workers and employers survey. Random Effect (RE) was used to estimate the effects of these factors on wages. Findings from the RE showed that only co-workers’ education had a positive and significant impact on individual wages. One year of colleagues’ additional schooling will increase the individuals’ earnings between 2.8 and 4.7 percent a year. Women experience a higher wage premium than that of men (4.7 against 3.5 percent). In addition, educational dispersion between respondents and workplaces also had a significant impact on earnings as it increases workers’ earnings between 2 and 3.7 percent for every additional increase of one standard deviation of the educational dispersion. These positive effects can be interpreted as the existence of positive spillovers or externalities of the education of colleagues at the workplace as it can enhance productivity of other employees in the same organization.