from socialism to a market economy caused a change in the returns to schooling in transition countries. It extends the analysis beyond other papers in this literature by explicitly looking at the impact of EU accession. Since both events (transition and EU accession) represent critical changes in terms of political organization, markets, and trade, among others, this research explores the transmission channel by which each shock could have affected returns to schooling. Given the increased trade and economic integration in Europe post-transition, the premium to skills has increased. We have shown a link between transition and the economic benefits of schooling. We test if the returns to schooling increased significantly as a result of transition and EU integration, with the corollary that the driver of the increase in the returns is openness to trade, eased by transition and EU membership.

# **Data**

The data for this analysis stems from two main sources. First, the <u>Comparable Returns to Education</u> database was used as the main source of private returns to education data. This database was supplemented with Psacharopoulos and Patrinos (2018) to make up for the gaps. Meanwhile, the data source of the average years of schooling per country was taken from the Barro-Lee Educational Attainment Database (Barro and Lee 2013). This dataset contains the educational attainment of the population, including average schooling years, for 146 countries around the world in 5-year intervals. These two key databases were selected as they ensure comparability across countries.

We analyze the returns to education in 28 transition countries (see Annex 1). Here we define postsocialist/transition countries as all European and Central Asian countries that were part of the Soviet Union and socialist pact until the fall of the Soviet Union by the end of 1991. We have data on the returns to schooling before transition (circa 1992) for 11 countries. We have data for 20 non-transition, European, and ECA countries (see Annex 2). Regarding schooling years, Barro and Lee (2013) are used.

Since Barro and Lee (2013) have schooling estimates for five-year intervals, we have computed the five-year average of the returns to education for the 48 transition and non-transition countries in our sample. This procedure leaves us with two observations per decade for each country, by taking as reference the decade of the 1980s, the first five-year observation contains the average of years 1980 to 1984, while the second observation has the average of the years 1985 to 1989. This gives us a total of 235 data points, of which 108 (46 percent) belong to the transition group and 127 (54 percent) are part of the non-transition group.

Since the fall of the Soviet Union and its bloc implied a deep transformation in terms of democracy and trade openness for most of the transition countries, which may have affected their labor demand, we include two sources related to these changes: the polity index and trade as a percentage of GDP. We chose these variables because they affect the labor market and their time series include pre-transition years (i.e., years before 1992). It has been shown that democracy is positively associated with an increase in the returns to education as a result of political and economic reforms adopted by democratic governments (Uwaifo 2008), namely the fraction of the economic output that workers received as wages for their work. International trade increases the demand for skills 4