# **I.** **<u>Introduction</u>**

Hundreds of studies measure the private returns to schooling, most focusing on a single country or on a small subset of countries. Following the empirical formulation developed by Mincer (1974), inferences on returns to schooling and work experience are derived from the regression coefficients of log earnings on years of schooling and quadratic terms in age. Due mainly to the work of George Psacharopolous and his colleagues (Psacharopoulos (1973), Psacharopoulos (1994), Psacharopoulos and Patrinos (2004)), we have compilations of estimated returns to schooling across many countries. These estimates show some remarkable consistencies. Despite differences in estimation methods, specifications, and level of economic development, virtually all studies show that earnings rise with years of schooling and increase at a declining rate in age or work experience. In almost all data sets, the largest percentage annual wage gains are captured by the youngest workers. The wage gain from additional experience gets smaller and may even turn negative with age.

If factors flow easily across markets, we would expect equalization of marginal returns to those factors. For example, a prominent literature in economic development finds that when measured properly, the marginal product of physical capital is nearly equal across rich and poor countries (Lucas Jr. (1990) and Caselli and Feyrer (2007)). The evidence suggests that credit frictions are not retarding capital investments in developing countries. But while physical capital flows easily across countries, human capital does not. Therefore, there could be substantial variation in the marginal returns to human capital across countries, even as the earnings functions display similar tendencies across countries.

In fact, returns per year of schooling tend to vary within a narrow range across developed countries. Estimated private returns to schooling for the United States range narrowly around 10%, despite differences in data sets and methodologies employed. Returns to schooling in other developed countries are similar to the estimated returns in the United States.<sup>1</sup> But labor flows relatively easily across rich countries compared to labor flows between poor and rich countries. For that reason, we might expect more evidence of unequal returns to human capital across developing countries, an expectation that is readily apparent in the data. Despite demonstrating common tendencies in the effects of education and work experience on earnings across developing countries, estimated marginal returns to an additional year of schooling or to an additional year of potential work life vary tremendously.<sup>2</sup> Figure 1A shows the distribution of estimated returns to schooling across 122 data sets from 86 different developing countries. While the average return is 8%, reasonably consistent with returns estimated for developed countries, the variation is substantial. The 90<sup>th</sup> percentile return is more than 3 times the 10<sup>th</sup> percentile return. Figure 1B shows the corresponding distribution of returns to experience across the same sample of countries. The 90<sup>th</sup> percentile return to experience is over 7 times larger than the 10<sup>th</sup> percentile return! Given the important

> 1 See Table 4 in Card (1999) for a summary of recent estimated returns to schooling in developed countries. Recent reviews of returns to schooling in developing countries include Orazem and King (2008) and  Montenegro and Patrinos (2009).

> 2 In our investigation of 122 developing country data sets, only 2 failed to generate positive returns to schooling and 7 failed to generate rising returns to age.

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