Abstract
While there is extensive literature discussing the return to education using the remarkable semi-log Mincer equation, very few studies utilize the full discounting method to examine the impact of education investment from an individual perspective. This paper tries to analyze the return to higher education in Indonesia through the full discounting method mainly using the Indonesia Family Life Survey wave 5 (IFLS-5) and Synthetic Work-life Earnings (SWE) estimation. The results indicate that the median college graduate workers earn about 60% higher salary than that of secondary school leavers. With 4 years to complete a college degree, this figure indicates that the return to higher education is implicitly around 15%, which is similar to the result of the Mincer earnings equation analysis. Moreover, it takes at least 14 years of working time to compensate for the investment in getting a bachelor’s degree. These findings suggest that households should consider spending their money for university education. Likewise, the government and financial institutions can provide a better loan policy for higher education.
Highlights
To some people, achieving a higher level of education is necessary as it leads to a better career and higher-earnings Card (1999)
The primary objective is to calculate the rate of return to education using the full discounting method, this study examines the return to education through the Mincer earnings equation for comparison
4.1 Data characteristics 4.1.1 Data on earnings the total respondents reached 50,148 persons from the Indonesia Family Life Survey (IFLS)-5 raw data, the total number of workers who fall under the category between 15 years old and 64 years old is only less than half of the sample or only 24,489 persons to be precise
Summary
To some people, achieving a higher level of education is necessary as it leads to a better career and higher-earnings Card (1999). The full discounting method is a process of finding the discount rate that satisfies the flow of discounted benefits against the sum of expenditures at a specific point in time (see Psacharopoulos and Mattson 1998) It follows the typical human capital theory, which indicates that a return determines a decision for a person to invest in a specific level of education. Psacharopoulos (1995) constructed total expected work-life earnings using the mean of earnings at a specific age and level education In this research, he used 1989 household survey data in Venezuela and found that return to education for primary, secondary, and tertiary school is 29.4%, 10.2%, and 12.4%, respectively. This methodology can be used to observe the work-life earnings gap between individuals through education attainment levels
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