We analyse the returns to schooling in Zambia in a human capital model where participation and sector choice are assumed endogenous. In urban areas, we find that the return to primary schooling is almost nil, whereas in rural areas, the return to primary education is positive. In both cases the returns to secondary education are significant. Regarding the allocation of workers across sectors, the most able females in rural areas become self-employed, whereas males are allocated according to their comparative advantages. Females in urban areas are allocated according to their comparative advantages, whereas males are negatively self-selected into the formal sector.