# **Earnings and Education**

The issue of returns to education is of particular interest for Latvia, where the labor force is increasingly well-educated, as shown in Table 3. Earnings functions specifications using LFS 2002 are presented in Appendix Tables 24 and 25. These specifications account both for observable characteristics of individuals, and those of the firms in which they are employed. Appendix Table 24, however, does not control for occupation and plant size, while Appendix Table 25 does. Comparison of these two sets of results helps to understand how human capital is rewarded in the labor market, and also gives useful insights related to gender and ethnic issues. See Box 3 for a discussion. Figure 22 summarizes the findings about current returns to education in the Latvian labor market. Appendix Tables 27 provides means of the variables, used in earnings functions by gender and ethnicity.

**Table 3.  Full-Time Employees by Educational Attainment, 1997-2002**

|**Education**|**1997**|**1998**|**1999**|**2000**|**2001**|**2002**|
|---|---|---|---|---|---|---|
|Higher|18.8|20.0|20.9|21.9|22.1|23.2|
|Secondary<sup>a</sup>|65.6|65.9|65.2|64.3|63.3|64.4|
|Vocational<br>Basic|3.9|3.4|3.9|3.6|3.3|1.7|
|Basic|10.4|9.5|9.1|9.2|10.3|9.8|
|Less than<br>Basic|1.4|1.2|1.0|1.0|1.1|0.8|

Notes:<sup>a</sup> Including general and technical secondary, as well as postsecondary vocational. _Source_ : LFS data and Calculation

# **_<u>Box 3  Data and Methodology</u>_**

The conventional approach to the analysis of wage structure is to estimate an earnings function. This function describes the relationship between the (logarithm of) wages and observable workers’ and firms’ characteristics. To ensure reliability of the estimated relationship, one needs a representative sample of several thousand employees.

The Latvian LFS provides a large, representative sample of the Latvian population. Until recently, however, wages in the LFS were reported only in broad intervals. This meant, for example, that it was not possible to distinguish between workers who earn 250 and those who earn 400 LVL per month. The highest earnings category included in the questionnaire was “more than 200”. Moreover, respondents were asked to report gross rather than net wages, which may also create some confusion for those receiving “envelope wages”, who may not know their gross salaries. The Household Budget Survey (HBS), the leading alternative source of labor market information, collects data on wages but has much smaller sample. It does not contain as detailed information about respondents' jobs as the LFS. As well, NORBALT (1999) dataset, which recently became available, contains detailed information on individuals and their wages, but includes less than 2000 observations for which wages are reported or can be derived.

Overall, the LFS appears to be the most appropriate data source to use in analyzing wage structure in Latvia. Since 2002, LFS respondents have been asked to report net wages, and the number of wage intervals has been refined. LFS 2002 data, which contains about 7,000 employees, can therefore provide an accurate data source for estimating earnings functions. To evaluate qualitative changes in the wage structure over time, comparable earnings functions based on the 1997-2002 LFS are estimated. Using this methodology we are also able to compare the market value of education accumulated in the Soviet era and post-Soviet education.

To verify that wage interval information contained in the LFS 2002 indeed provides reliable results, Appendix Table 26 compares several key indicators derived from these data with those obtained from NORBALT (1999) project data. The model specification is restricted by information available for respondents in the NORBALT data, so that job tenure, job location and ownership sector are not controlled for in these benchmark models.

**Human capital and earnings.** By the year 2002 total returns to higher vs. basic education in the Latvian labor market amounted to 80 percent on average. This implies that, on average, an individual with higher

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