The returns to education in Malta

Abstract

There is little comprehension of the determinants of the derived demand for labour with different amounts of schooling. The idea of education translating into capital is rooted in the concept of human capital, which, in theory, attaches a high premium to human skills. For decades there has been a consensus that education is a determining factor of earnings in the labour market. conventional economic theory postulates that as an individual attains higher educational achievements, the expected starting salary increases and the rise in earnings would be steeper. In general, it is evident, that employees with higher levels of education are rewarded by higher wages. However, the element or ingredients of what makes people more productive in the labour force is still meagre. In the 60 plus year history of returns to education, literature on the returns to education provides conflicting estimates depending on the methodology that is utilised to undertake the study. Moreover, studies provide conflicting arguments as to where these returns are the highest creating a policy dilemma as to which areas of education should be targeted for investment by government to reap the highest returns. This study endeavours to determine the relationship between the years of schooling and earnings in Malta. Moreover, this study seeks to determine whether returns to investment in education vary across education levels. The estimates for returns to education in this study have been undertaken utilising two different techniques; - the basic Mincer estimation and instrumental variables estimation. The results obtained from both estimation techniques, reveal that the mean monthly earnings of workers increase with additional years of schooling. The results indicate that spending an additional year in education is more valuable in terms of earnings when compared to work experience. The results divulge information about the returns to the three different sectors in education. The sector providing the highest returns on an individual level is primary education, followed respectively by tertiary education and secondary education.