_Annex 2. COMPUTING SOCIAL RATES OF RETURN TO INVESTMENTS IN EDUCATION_

**Table A2.1. Mean Annual Earnings at Different Age Groups (in thousands Rupiah)**

|Level of Education|<14<br>(1)|15-20<br>(2)|**A**<br>21-30<br>(3)|**ge Groups**<br>31-40<br>(4)|41-50<br>(5)|51-60<br>(6)|61-70<br>(7)|
|---|---|---|---|---|---|---|---|
|No school|2,665|4,328|4,655|4,983|4,892|4,406|3,545|
|Primary|4,211|4,790|5,978|6,750|7,182|7,955|5,985|
|Junior High School General|4,346|5,474|7,292|8,387|10,216|10,562|8,068|
|Senior High School General|---|7,408|8,374|12,088|16,193|18,983|12,114|

_Source_ : National Labor Survey (Sakernas) 2006.

Data on wages per level of education and age group was computed based on the National Labor Survey (Sakernas) released in February 2006. These data covers 178,228 individuals who received salaries and wages in monetary terms or in kind. The net wage differentials for each age group is defined as the difference between average wages at each level of education and the average wages at a lower level of education. That is, for example, that the net differential for primary education, equals the difference between the average wage level of a person with primary education and that of a person with no education (or Rp. 4,211 – Rp. 2,665 = Rp. 1,546). The summation of net wage differentials over an expected time of work of 50 years into the future (from years 15 to 65) constitutes the social benefits in the cost benefit analysis of the returns to education.<sup>39</sup> Foregone wage and salary earnings are equal to 75 percent of the average earnings of individuals at a lower level education. The 75 percent is used to adjust for the percent of time that children attend school each year (technically student could work full time for the remaining 25 percent of the year).

**Table A2.2. Investment Costs: Direct and Indirect Costs of Education**

||**Foregone**<br>**Earnings**<br>**(1)**|**Direct Costs**<br>**(2)**|**Annual Total Costs**<br>**(3)**|**Total Costs Over Full**<br>**Period**<br>**(4)**|
|---|---|---|---|---|
|No school|- -|- -|- -|- -|
|Primary|3,246|2,880|6,126|36,754|
|Junior High School General|3,593|4,301|7,894|22,682|
|Senior High School General|4,106|5.143|9,250|27,749|

_Source_ : World Bank staff estimates The direct costs of providing education at each level is the aggregate of the unit costs incurred at the school level and at each level of government in all administrative functions entailed in the provision of that level of education. The units costs used in this computation are reported in Table A2.3. These figures were drawn from a survey study of 2016 schools covering Primary Schools, Madrasah Ibtidaiyah (Moslem Primary Schools), Junior High School, Madrasah Tsanawiyah (Moslem Junior High School, Senior High School, Madrasah Aliyah (Moslem Senior High School and SMK (Technical Senior High Schools) within 56 districts and 15 province in Indonesia.<sup>40</sup> The unit cost at the school level covers costs such as teacher’s salary; purchasing of classroom materials; school building development for classrooms as well as costs incurred to fund activities not directly related to the learning process but support this operation of the school, such as: principal and administration staff’s salary; purchasing of schools equipment and peripheral for the principal and administration staff; and development and maintenance of buildings for the principal and administration staff.

> 39 This is an admittedly narrow definition of benefits. Other methodologies entail broader definitions of benefits by including non-market benefits of education; such as benefits to civic institutions, to private and public health, and to fertility rates and /or the feedback of indirect earnings in the economy; for example, as firms are attracted to community seeking skilled labor en good environment. effect on growth (for a further discussion of these type of estimations see McMahon and Appiah, 2001).

> 40 This survey was conducted for the Ministry of Education, financed by UNESCO, and lead by Abbas Ghozali. See Ghozali (2005).

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