Addressing endogeneity problem in estimating economic returns to schooling in Malaysia

Norlin Khalid, Rahmah Ismail, Wye Chung Khain, Suhaili Alma`Amun, Hakimah Nur Ahmad Hamidi

Research output: Contribution to journalArticle

Abstract

The Ordinary Least Square coefficient of years of schooling in standard Mincer's (1974) equation may not reflect the effect of education on wages if it is correlated with ability of individual that also correlated with wages. Furthermore, productivity and skills between gender also may contribute differently on wages. Hence, this paper aims to estimate the economic returns to schooling on wages for Malaysia by using data gathered from the field survey of 1263 respondents in 2015. The contribution of this paper is twofold. First, we construct an ability index of individual during schooling and workplace to tackle the problem of omitted ability variable bias in OLS estimation. Then we compare this outcome with instrumental variable method by using family background as the instrument for education, taking into account the endogeneity problem. Second, we also investigate if the overall effect of education on wages reponds differently between genders by comparing both OLS and IV estimations. Our results indicate that family background is proven to be the best instrument for education, taking into account the endogeneity problem. Then, the IV rate of return for overall sample and split sample are higher than OLS. In regard of genders, the OLS suggests higher rate of return of men while IV estimates higher rate of return of women. These results have particularly important policy implications, concerning the government wage policies to achieve fair income between genders and thus contribute to the further development of Malaysian labor market efficiency.

Original languageEnglish
Pages (from-to)537-549
Number of pages13
JournalInternational Journal of Economics and Management
Volume12
Issue number2
Publication statusPublished - 1 Jan 2018

Fingerprint

Economic returns
Returns to schooling
Endogeneity
Malaysia
Wages
Education
Rate of return
Schooling
Family background
Labour market
Income
Instrumental variables
Ordinary least squares
Policy implications
Work place
Coefficients
Wage policy
IV estimation
Productivity
Government

Keywords

  • Education
  • Instrumental variable approach
  • Wages
  • Workers ability

ASJC Scopus subject areas

  • Business and International Management
  • Economics, Econometrics and Finance(all)
  • Strategy and Management

Cite this

Addressing endogeneity problem in estimating economic returns to schooling in Malaysia. / Khalid, Norlin; Ismail, Rahmah; Khain, Wye Chung; Alma`Amun, Suhaili; Hamidi, Hakimah Nur Ahmad.

In: International Journal of Economics and Management, Vol. 12, No. 2, 01.01.2018, p. 537-549.

Research output: Contribution to journalArticle

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