_the study countries_ - access to capital, and difficulty in finding and keeping customers in this highly competitive sector.

# **What determines HE earnings?**

HE owners have a range of personal characteristics, but which ones matter most for earnings? To gauge this question, we ran a simple OLS regression analysis on owners reported gross earnings per hour (e.g. reported gross profits per hour worked by the owner), using age, level of education and training, gender, hours of work, and location as explanatory variables. This simple analysis has several weaknesses. First, we could not control for capital so returns to assets are included as owner‟s earnings. Second, we did not have variables commonly used to control for the unobserved selection that led a person to start a HE (e.g. know how, networks, business skills, etc.)<sup>.9</sup> Since we have only HE owners in the sample, many of these unmeasured personal characteristics will be present at a similar level in, for example, most urban HE owners. Other characteristics will vary across the sample, but may be correlated with education, possibly causing this variable to be overstated.

HE owners‟ education is highly correlated with earnings. The higher level of education the higher earnings. Consistent with that finding that those with completed primary education had the highest propensity to be HE owners, standardized regressions<sup>10</sup> of hourly earnings for Tanzania, Rwanda and Ghana show that HEs owners do have positive and increasing returns to education if they complete primary, but education below this level does not add significantly to returns in two out of three countries. (Annex Table 2). In both Tanzania and Rwanda, there is no return to having started, but not completed primary education. This is striking given that the majority of HE owners in Rwanda are in this category. But these results may also reflect the tendency of the education variable to pick up the returns to a number of correlated skills and personality traits picked up at home or elsewhere, such as business knowhow, motivation and determination, or family support. For example, in Ghana, where half of the HE owners have attained above primary education, and where there is a long tradition of HEs so that it is easier to acquire business know-how, the returns to education at the higher levels are lowest. And Ghana has the most educated work force among the three countries, so the selectivity associated with primary education should be lower. This may explain why the returns to education in Ghana are the lowest among the three countries and barely increase between complete primary and above primary. Kuepie et al (2009) compared estimated returns to education in all informal jobs in West Africa using an instrumental variables approach and found similar ranges as ours, suggesting that our simple procedure has not vastly overestimated returns to education.

> 9 The most common selection correction in earnings regressions is to model the decision to enter the labor force for women, using variables such as number of children to identify the equation. But a decision to be a HE owner is not the same as the decision to participate in the labor force so variables such as household demographics are not helpful. Occupational choice regressions done by others suggest that HE ownership seems to be conditional on many of the variables we already have in the earnings regression such as education and location, and on other personal characteristics that are not measured in these data sets (Kuepie et al, 2009). After several failures at identification, we went back to simple OLS earnings regressions.

> 10 More elaborate regressions taking advantage of additional information found in some countries but not in others, and run separately for male, female, rural and urban are found in separate papers for each country.(World Bank, 2011a and 2001b, and Kweka and Fox, 2011)  The results presented here are qualitatively similar to the more elaborate regressions, except in Ghana where we found a significant difference in returns to education for urban and rural HE owners - returns. Returns to primary education are positive and significant in rural areas, while in urban areas, the returns to education below secondary are insignificant.

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