metadata: authors: 0: author: Sakellariou,Chris
1: author: Di Gropello,Emanuela
count: East Asia and Pacific
docna: 0: docna: Industry and skill wage premiums in east Asia
docty: Policy Research Working Paper
subtopic: Skills Development and Labor Force Training,Educational Sciences,International Trade and Trade Rules,Food Security
teratopic: Social Protections and Labor,Water Resources,Education
abstracts: cdata!: This paper focuses on the estimation of
            skill/industry premiums and labor force composition at the
            national and sector levels in seven East Asian countries
            with the objective of providing a comprehensive analysis of
            trends in demand for skills in the region. The paper
            addresses the following questions: Are there converging or
            diverging trends in the region regarding the evolution of
            skill premiums and labor force composition? Are changes in
            skill premiums generalized or industry-related? How have
            industry premiums evolved? The analysis uses labor and
            household surveys going back at least 10 years. The main
            trends emerging from the analysis are: (a) increasing
            proportions of skilled/educated workers over the long run
            across the region; (b) generally increasing demand for
            skills in the region; (c) the service sector has become the
            most important driver of demand for skills for all countries
            (except Thailand); (d) countries can be broadly categorized
            into three groups in relation to trends and patterns of
            demand for skills (Indonesia, Philippines, and Thailand;
            Vietnam and China; and Cambodia and Mongolia); and (e)
            industry premiums have increased in three countries of the
            region (Philippines, Thailand, and Cambodia). These trends
            point to several policy implications, including that
            governments should focus on policies promoting access to
            education to address the increasing demand for skills and/or
            persistent skill shortages; support general rather than
            specific curricula given broad-based increases in skill
            premiums in most countries; better tailor curriculum design
            and content and pedagogical approaches to the needs of the
            service sector; and target some social protection programs
            to unskilled workers to protect them from the
            "unequalizing" impact of education.
repnme: repnme: Industry and skill wage premiums in east Asia
display_title: Industry and skill wage premiums in
            east Asia
listing_relative_url: /research/2010/07/12583780/industry-skill-wage-premiums-east-asia
topicv3: Education, Skills Development and Labor
            Market m1326135 1484,Agriculture and Food Security m1326205 435,Trade m1326924 698,Education m1327048 470,Skilled Workers m1504035 2732
publishtoextweb_dt: 2010-07-01T00:00:00Z
historic_topic: Social Protections and Labor,Water Resources,Education
no_of_pages: 100
author_keys: 0: author_key: 428386
1: author_key: 453543
model_extractions: WPS5379 Policy Research Working Paper 5379 Industry and Skill Wage Premiums in East Asia _Emanuela di Gropello Chris Sakellariou_ The World Bank East Asia and Pacific Region Education Unit, Human Development Sector July 2010
Policy Research Working Paper 5379

# **Abstract**

This paper focuses on the estimation of skill/industry premiums and labor force composition at the national and sector levels in seven East Asian countries with the objective of providing a comprehensive analysis of trends in demand for skills in the region. The paper addresses the following questions: Are there converging or diverging trends in the region regarding the evolution of skill premiums and labor force composition? Are changes in skill premiums generalized or industry-related? How have industry premiums evolved? The analysis uses labor and household surveys going back at least 10 years. The main trends emerging from the analysis are: (a) increasing proportions of skilled/educated workers over the long run across the region; (b) generally increasing demand for skills in the region; (c) the service sector has become the most important driver of demand for skills for all countries (except Thailand); (d) countries can be broadly categorized into three groups in relation to trends and patterns of demand for skills (Indonesia, Philippines, and Thailand; Vietnam and China; and Cambodia and Mongolia); and (e) industry premiums have increased in three countries of the region (Philippines, Thailand, and Cambodia). These trends point to several policy implications, including that governments should focus on policies promoting access to education to address the increasing demand for skills and/or persistent skill shortages; support general rather than specific curricula given broad-based increases in skill premiums in most countries; better tailor curriculum design and content and pedagogical approaches to the needs of the service sector; and target some social protection programs to unskilled workers to protect them from the “unequalizing” impact of education.

This paper—a product of the Education Unit, Human Development Sector, East Asia and Pacific Region—is part of a larger effort in the department to assess demand for skills in East Asia and its implications for skill development. Policy Research Working Papers are also posted on the Web at http://econ.worldbank.org. The author may be contacted at edigropello@worldbank.org.

_The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent._ Produced by the Research Support Team
# **Industry and Skill Wage Premiums in East Asia (*)**

**Emanuela di Gropello Human Development Unit East Asia Region The World Bank e-mail:** **<u>edigropello@worldbank.org</u>**

**Chris Sakellariou Economics, HSS Nanyang Technological University Singapore e-mail:** **<u>acsake@ntu.edu.sg</u>**

(*) This paper is part of the Study on Openness and Labor Demand in East Asia (DECRG Research Grant (RSB-P110368)), which contributes to the broader Regional Study on Skills in East Asia. The paper also counted with the contribution of Hong Tan for the processing and analysis of Philippines data and indicators.
# **1. Context**

East Asian countries are undergoing deep structural changes, with resources shifting from agriculture to manufacturing and services, from resource-based products to laborintensive low technology products, and -- in some countries -- from the latter to medium/high technology products. Some countries like Malaysia and Thailand are ahead of others in this process, but most of the other countries of the region, including lower income ones like Vietnam, are following close behind. The nature and the skills content of jobs are changing in response to these deep structural shifts. Many jobs are being created in relatively more skilled activities in manufacturing, but also in certain service activities that require low and medium level skills that are nonetheless different from those of the jobs being destroyed. In some rapidly-growing economies, such as China, emerging skill shortages threaten to undermine the competitiveness of export oriented firms. This evolving context raises key issues regarding the links between skills, labor reallocation and productivity growth in East Asian economies, but this type of analysis and research, which is rapidly developing for other regions including the OECD, LAC and ECA, is still fairly scarce in East Asia.

The regional study on skills attempts to close this gap in two ways. First, it wants to document in a systematic and comparable manner the evolution of skill/industry premiums, and of the labor force composition across East Asian economies to identify trends in the demand for skills and emerging skill gaps. Second, it wants to analyze the relationship between openness and changes in labor demand. The central question in this section will be whether openness is accompanied or not by skill upgrading, or, in other words, is consistent with evidence of skill-biased technological change. A related question is whether increased openness has benefited only skilled workers, or all workers in certain sectors. The analysis will be performed by comparing how skill/industry premiums and labor force composition relate to openness in a systematic and comparable way across countries.

Understanding the evolution and determinants of the demand for skills is relevant from both an academic and policy perspective. From an academic perspective, trade theory indicates that increased trade has an ambiguous effect on skill premiums and demand for 2
skills in general (see, for instance, O'Connor and Lunati, 1999). On the one hand, traditional trade theory suggests that with increased trade skill premiums should decrease in labor-intensive countries. Recent studies, however, show that skill premiums can increase if trade leads to the adoption of better performing skill-biased technologies (Berman et al., 1998; Keller, 2004), or to increased skill-enhancing investments (Feenstra and Hanson, 1997; Harrison and Hanson, 1999). Very few studies have documented these issues in East Asia (see World Bank (2007) on Vietnam; Alatas and Bourguignon (2005) and Abu-Ghaida and Connolly (2003) on Indonesia; Zeufack and Udomsaph (2006) on Thailand; and Heckman and Li (2003) and Fajnzylber and Fernandes (2004) on China) and most of them have not gone beyond the analysis of trends. Additionally, methodologies differ across existing studies making it difficult to compare them. As little is known about the evolution and drivers of skill premiums in East Asia, constructing comparable measures to understand how skill demand evolved in these rapidly growing countries, and linking these changes to variables such as trade and FDI will help shed light on consequences of rapid export-led growth. From a policy perspective, understanding the extent to which skill demand has increased, what has driven the changes, which sectors have become more skill intensive, and which types of workers remain vulnerable, can lead to key policy recommendations ranging from the expansion and improved relevance of education opportunities, to a better targeting of social protection and pro-poor policies in the region and reforms to improve the functioning of labor markets.

This paper focuses on the estimation of skill/industry premiums and the labor force composition (i.e., the proportion of skilled labor by sector) at the national and sectoral level (one or two digit) with the objective to provide a comprehensive description of trends in skill premiums and labor force composition over several years. Although no attempt will be made to explain these trends, a comprehensive description will already allow answering relevant questions such as: Did income inequalities increase or decrease? Can we observe converging or diverging trends in the region regarding the evolution of skill premiums and of the labor force composition? Are changes in skill premiums generalized or industry-related? Is there evidence of labor market segmentation?

3
In(awyje) = Ain + Sit . Tze SP yt + Tizt Wp ye + fife (1)
for heads of household, while a 1-digit classification was available for all members. The surveys and years for different countries are as follows: Indonesia – Sakernas Survey for years 1994, 1996, 1999, 2001, 2003, 2005 and 2007; Philippines – LFS Survey for years 1988, 1991, 1994, 1997, 2001, 2004, 2006; Thailand - - Socio-economic Survey for years 1990, 1992, 1994, 1996, 1998, 2000, 2002, 2004; Vietnam – VLSS for years 1992, 1998, 2004, 2006; Cambodia – Socio-economic Survey for years 1997, 2003-4 and 2007; China – China Urban Labor Survey for years 1999 and 2005; and Mongolia – LSMS 1998, 2002 and 2007-8.

In estimating equation (1), the datasets were standardized across countries and years in terms of variables used. The dependent variable is the logarithm of hourly wage, except for Thailand where the dependent variable is the monthly wage, as the data did not contain the necessary information for the calculation of the hourly wage. The estimation sample contains workers over the age of 15. Data issues did not permit standardization of the composition of the sample of workers across countries: thus for Indonesia and Vietnam earnings are reported for those in wage employment; for the rest of the countries the sample includes a mixture of workers employed for wages.

# **4. Results**

# _4.1. Educational Attainment and Skilled Labor_

Trends in educational attainment by country are reported in Tables A1- A7 in the Appendix. The comparative percentage change in highest education qualifications over time is reported in Table 1 below. At the beginning of the 1990s with the exception of Cambodia, Thailand had the lowest educational attainment of the working population, as reflected in the average years of schooling as well as the proportion of workers with secondary or higher qualifications. Between 1990 and 2004 educational attainment in Thailand increased dramatically at all levels, especially at the upper secondary and tertiary levels with the proportion of workers with upper secondary and tertiary qualifications doubling during the same period. A similar evolution of educational attainment is observed in Indonesia. The proportion of workers with tertiary 5
qualifications (university and diploma) increased by more than 190 percent, with the proportion of workers with university degrees increasing by almost 4 times. The Philippines, prior to 1990 was the most educationally advanced among the countries examined, with about 10 percent of its working population having university degrees by 1988. Subsequently, the proportion of workers with upper secondary or higher qualifications increased further, albeit at a slower rate compared to Indonesia and Thailand, having started from a higher base.

Vietnam faced considerable constraints to competitiveness and growth due to insufficient education and labor skills in its workforce. The proportion of university educated working population increased from 1.8 percent in 1992 to about 3.6 percent in 2006, while the corresponding increase for those employed for wages (i.e., excluding the selfemployed) was from 6.7 percent in 1992 to about 13 percent in 2006. Smaller increases are observed in upper secondary qualifications.

Table 1: Percentage change in highest education qualifications over time (workers with <u>positive reported earnings)</u>

|_Education_||||% change||||
|---|---|---|---|---|---|---|---|
||Indonesia<br>1994-07|Philippines<br>1988-06|Thailand<br>1990-04|Vietnam<br>1992-06|Cambodia*<br>1997-07|China**<br>1999-05|Mongolia<br>1998-2007|
|Years of schooling|29.3||23.8|15.6|5.1|4.6|-|
|Less than primary complete|-69.8|-33.7|-32.9|-33.2|4.0|-59.3|-|
|Primary|-32.7|-30.9|31.4|-12.1|2.3|-45.0|31.2|
|Lower secondary|24.6|5.3|45.2|11.6|-12.2|-16.6|9.8|
|Upper secondary general|59.3|45.0|100.0|20.2|-22.1|19.3|59.7|
|Upper sec. voc./higher voc.|-9.6|-|14.7|42.2|-|-|180.6|
|Tertiary|190.3|37.1|98.4|94.0|65.0|15.2|-44.5|

* Registered declines in the proportion of workers with secondary qualifications between 2003-4 and 2007 in Cambodia are probably attributable to differences in the composition of the sample of workers by type of employment. ** Urban areas only.

Establishing the evolution of educational attainment in Cambodia and comparing it to other countries in SE Asia proved problematic: first, the time frame (1997-2007)<sup>2</sup> is shorter and does not extend to the early 1990s; second, comparison between cross sections is problematic, as the composition of the (smaller) 2007 sample of workers with

> 2 Pending acquisition of the 1993 CSES.

6
reported wages is different from the 2003-4. The CSES data used suggest that between 1997 and 2007, educational attainment as measured by average years of schooling of working population increased by about 31 percent (mostly because of large increases in secondary and tertiary qualifications); however, when we consider the much smaller sample of workers with reported earnings, the increase in average educational attainment (years of schooling) is only about 5 percent over the 1997-2007 period, reflecting a small increase in workers who are primary school educated and a large increase in tertiary qualifications. Furthermore, the proportion of workers with secondary qualifications shows a decline (Table 1).

In the case of China, the results are based on only 2 surveys of urban population spanning the 1999-2005 period. Even during this relatively short period, the composition of educational qualification of the working population changed substantially; the proportion of workers with lower secondary or lower qualifications decreased drastically, while those with upper secondary and tertiary qualifications increased by almost 20 percent and 15 percent respectively.

In Mongolia and the sample of wage employees with reported earnings, the composition of education qualifications changes substantially over time, with the proportion of those with upper secondary qualifications (especially vocational qualifications) increasing substantially over the last decade and (counter-intuitively) the proportion of those with tertiary (diploma or university) qualifications decreasing by 45 percent. This implies that the 2007 sample of wage employees used was less skilled compared to the 1998 sample, especially for those with tertiary qualifications.

Table 2 summarizes the over time changes in labor force composition by 1-digit industry group (Tables A8 to A14 provide the details by country). One common finding is the shift away from agriculture. The industries which gained in employment in Indonesia, Philippines, Thailand, Vietnam and China (Cambodia is discussed separately), are Retail and Wholesale trade as well as the Finance/Business sector within services. The share of manufacturing increased somewhat in Thailand, while it decreased somewhat in Indonesia the Philippines, Vietnam and the urban centers of China.

7
Table 2: Percentage change in Labor Force composition by selected industry group over time <u>(Workers with positive reported earnings)</u>

|Industry||||% change||||
|---|---|---|---|---|---|---|---|
||Indonesia<br>1994-07|Philippines<br>1988-06|Thailand<br>1990-04|Vietnam<br>1992-06|Cambodia<br>1997-07|China<br>1999-05|Mongolia<br>1998-07|
|Agriculture/Forestry/Fishery|-19.0|-27.8|-22.1|-36.8*|-19.0*|-81.8*|10.7|
|Mining|123.1|-66.7|0.0|-|-|-|-|
|Manufacturing|-11.7|-12.1|10.6|-10.0|96.7|-38.6|104.1|
|Utilities|20.0|0.0|-37.5|22.2|n/a|-60.8|35.3|
|Construction|-16.0|22.0|16.0|53.5|94.1|-50.0|168.6|
|Trade|28.4|37.2|60.8|97.9|-47.2|74.1|24.0|
|Transportation/Communication|6.8|54.0|-12.5|0.0|26.2|16.9|95.5|
|Finance/Business|34.6|117.6|-|122.2|171.4|n/a|-|
|Other Services|2.5|-1.8|-9.5|8.5|-45.8|36.5|-31.3|

* Combined with Mining

Using the sample of workers with reported earnings, in Cambodia (as reported in Table 2), besides the decline in the share of agriculture, other sectors which declined are trade and other services (mostly due to a decline in the share of public administration). The shares of manufacturing, construction and finance/business exhibited large increases over the last decade. However, when using the larger sample of employed individuals, the results are different with respect to the change in the share of trade: now this share shows a small increase as opposed to a large decline; otherwise, the two sets of results for Cambodia are generally consistent between the two samples.

With the exception of Cambodia (for upper secondary and above) and Mongolia, the proportion of skilled workers in Indonesia, Philippines, Thailand, Vietnam and China increased substantially on average (especially the proportion of workers with tertiary education) as well as across almost all major industries (Tables 3a and 3b). Increasing shares of skilled workers in the service sector combined with changing employment shares in its favor make it as a particularly dynamic market for skilled workers – as will be further confirmed with the wage skill premium analysis. The largest increase in Indonesia, Thailand and the Philippines is observed in agriculture where the proportion of skilled workers (defined as those with upper secondary education or higher), while it still remains low, nearly tripled in Indonesia and more than doubled in Thailand. In Vietnam the largest increase is found in transportation/communication, while the proportion of 8
skilled workers in agriculture decreased moderately. In China, substantial increases are observed in all industries except agriculture, utilities and other services.

Table 3a: Proportion of skilled workers by selected industry group over time <u>(Workers with positive earnings)</u>

|_Industry_||% Uppe|r Secondary a|nd above||
|---|---|---|---|---|---|
||Indones|ia<br>Philipp|ines<br>T|hailand|Vietnam|
||1996 2007|Change<br>1988 2006|Change<br>1990|2004 Change|1992 2006 change|
|Agriculture|6.2 16.1|9.9<br>29.6 41.0|11.4<br>2.4|5.6 3.2|8.6 7.7 -0.9|
|Mining|32.4 40.0|7.6<br>54.6 47.7|-6.9<br>25.0|33.3 8.3|46.9 47.0 0.1|
|Manufacturing|33.5 40.1|6.6<br>59.5 77.8|18.3<br>16.4|28.9 12.5|21.4 22.6 1.2|
|Utilities|72.4 79.9|7.5<br>89.9 98.0|8.1<br>52.8|57.6 4.8|65.0 88.1 23.1|
|Construction|20.3 29.9|9.6<br>52.9 66.0|13.1<br>9.9|13.8 3.9|17.7 20.0 2.3|
|Trade|54.3 56.3|2.0<br>60.4 77.9|17.5<br>17.5|28.5 11.0|29.5 43.3 13.8|
|Transp/Comm.|36.2 45.7|9.5<br>67.4 77.5|10.1<br>21.0|30.4 9.4|31.1 61.5 30.4|
|Finance/Business|86.4 84.1|-2.3<br>94.9 96.5|1.6|-|70.0 81.6 11.6|
|Public Admin.|67.9 80.8|12.9<br>92.1 91.2|-0.9|-|-|
|Other Services|-|92.3 91.8|-0.5<br>42.8|67.0 24.2|64.3 78.6 14.3|
|_Mean *_|-|||-|-|
|_Mean (1)_|44.2 55.5|11.3<br>49.6 65.9|16.3<br>17.7|28.8 11.1|29.1 36.7 7.6|
|_Mean(2)_|9.0 19.1|10.1<br>19.2 27.3|8.1<br>6.1|12.1 6.0|6.7 13.0 6.3|

# Table 3a continued

|_Industry_|% Upp|er Secondary and|above|
|---|---|---|---|
|C|ambodia|China|Mongolia|
|1997|2007 Change|1999 2005 Change|1998 2007 change|
|Agriculture<br>6.2|2.3 -3.9<br>|64.5 68.0 4.5|69.4 63.7 -5.7|
|Mining|-|n/a|-|
|Manufacturing<br>17.2|16.4 -0.8<br>|49.0 60.3 11.3|81.2 81.7 0.5|
|Utilities|-<br>|57.5 57.6 0.1|82.2 77.1 -5.1|
|Construction<br>10.4|14.1 3.7<br>|48.4 74.1 25.7|80.4 70.0 -10.4|
|Trade<br>13.2|23.9 10.7<br>|46.2 61.0 14.8|80.6 81.1 0.5|
|Transp/Comm.<br>16.4|16.9 0.5<br>|55.4 62.4 7.0|89.6 83.0 -6.6|
|Finance/Business<br>54.5|52.4 -2.1|n/a|-|
|Public Admin.<br>49.4|53.4 4.0<br>|74.3 86.2 11.9|90.8 91.3 0.6|
|Other Services<br>51.4|67.7 16.3<br>|66.8 69.3 2.5|85.4 88.3 2.9|
|_Mean *_<br>26.9|24.5 -2.4|-|-|
|_Mean (1)_<br>10.5|10.0 -0.5|56.4 66.5 10.1|84.9 82.2 -2.7|
|_Mean(2)_<br>0.02|0.033 1.3|21.0 24.3 3.3|58.2 32.8 -25.4|

9
Table 3b: Percentage change in the proportion of skilled workers by selected industry group over time <u>(Workers with positive reported earnings)</u>

|_Industry_|||% Upper S|econdary a|nd above|||
|---|---|---|---|---|---|---|---|
||Indonesia<br>1996-07|Philippines<br>1988-06|Thailand<br>1990-04|Vietnam<br>1992-06|Cambodia<br>1997-07|China<br>1999-05|Mongolia<br>1998-07|
|Agriculture|159.7|38.5|133.3|-11.4|-62.9|7.1|-8.1|
|Mining|23.5|-12.6|33.2|0.2|-|n/a|-|
|Manufacturing|19.7|30.8|76.2|5.6|-4.6|23.1|0.6|
|Utilities|10.4|9.0|9.1|1.1|-|0.0|-6.2|
|Construction|47.3|24.8|39.4|-10.7|35.5|53.1|-12.9|
|Trade|3.7|29.0|62.9|23.7|81.1|32.0|0.6|
|Transportation/Commun.|26.2|15.0|44.8|34.7|3.0|12.6|-7.4|
|Finance/Business|-2.7|1.7|-|13.1|-2.0|n/a|-|
|Public Admin.|19.0|-1.0|-|-|8.1|16.0|0.6|
|Other Services|-|-0.5|56.5|12.8|22.9|3.7|3.4|
|_Mean % change *_|-|-|-|-|-8.9|-|-|
|_Mean % change (1)_|25.6|32.9|62.7|26.1|-4.8|17.9|-3.2|
|_Mean % change (2)_|112.2|42.2|98.4|94.0|65.0|15.7|-43.6|

(1) Secondary education and above; (2) Tertiary education and above. * Lower secondary and above.

In Cambodia, once again the findings with respect to changes in skilled labor need to be contrasted between sample compositions (all employed workers vs. workers with reported earnings). In the case of the former, the proportion of skilled workers increased across the board and much more in agriculture, trade and construction (by 127, 79 and 69 percent respectively) and by only slightly in manufacturing and services. Overall, the proportion defined as those with lower secondary and higher qualifications increased by 60 percent, while the proportion of workers with upper secondary or tertiary qualifications increased by 45 percent. Once the sample is restricted to workers with reported earnings (Table 3), the findings change drastically, especially with respect to changes in agriculture. Now the proportion of skilled workers in agriculture exhibits a large decline of about 63 percent over the 1997-2007 period. Overall, the proportion of skilled workers independently of industry group registers a decline. On the other hand, the proportion of workers with tertiary qualifications exhibits a large increase.

Finally in Mongolia, small changes in skill composition are observed across industries, with most industries showing declines in the proportion of skilled workers. As in the case of Cambodia, here too there are data issues; as reported earlier, in the (lager) 2007 LSMS 10
the proportion of skilled workers (especially those with diplomas and university qualifications) is significantly smaller compared with the (smaller) 1998 and 2002 samples.

# _4.2. Estimates of Education/Skill Premiums and Labor Force Composition_

The tables below summarize the changes in skill premiums in each country. In interpreting the estimates in Tables 4-10, the base education level/skill on which other dummy variables are based are as follows: in Tables 4a-10a the base (reference) education level is “less than completed primary”; however, the presented return estimates for education levels higher than primary are given in comparison to primary. Thus, in Indonesia in 1994, the estimate of 1.125 for tertiary over primary is the difference in coefficients for tertiary and primary in the estimated earnings equation. Dividing 1.125 by the difference in years of education between tertiary and primary education (10 years) implies an annualized return of about 11.2%. Similarly, if one wants to derive an estimate of the return to tertiary over senior secondary (instead of primary), this would be the difference between 1.125 and 0.596, that is 0.529; annualized this implies an average return of 13.2% for each year of tertiary education over senior secondary. In Tables 4b10b a single dummy for skill is used with two alternative specifications: senior secondary and above vs. lower secondary and below and tertiary vs. senior secondary and below. Tables A15 to A21 provide more details on returns by education level by country.

In Indonesia, education premiums declined with the exception of primary education. The largest decline in education premiums over time occurred in junior and senior secondary education, with a smaller decline in tertiary education premiums and a small increase in the premium of primary education. Within senior secondary education, most of the decline in premiums is associated with vocational-technical education. To a large extent, the findings are similar for Thailand: Accounting for the effect of industry affiliation in the regressions, we see declining premiums in junior and senior secondary education and a smaller decline in tertiary education, along with a small increase in primary education premiums. As in the case of Indonesia, most of the decline in premiums in secondary education is associated with vocational-technical education. In fact, with only basic controls, premiums are on the rise in general senior Ssecondary and tertiary education. In 11
Vietnam, with the exception of tertiary education, education premiums were negative prior to the _Doi Moi_ reforms. Following the reforms, premiums soared for every education level and more so for tertiary qualifications. Very large increases in returns were observed for technical/Vvocational secondary education which was associated with significantly negative returns (compared to primary) in 1992. Subsequently, the increase in returns to secondary TVET outpaced that of secondary general education, and by 2006 the return to TVET slightly exceeded that of general education. In Cambodia and the Philippines, comparison of estimates without and with controlling for industry affiliation suggests that a large part of the increases in returns to education is industry-specific. In Cambodia, even after controlling for industry affiliation, education premiums have roughly doubled for secondary and tertiary education; while premiums decrease in the Philippines after controlling for industry affiliation. In urban China, between 1999 and 2005, the largest increases in education premiums were observed for secondary education, followed by tertiary education; no evidence of an increase in primary education premiums was found. Finally, in Mongolia, skill premiums seem to have been stagnant between 1998 and 2002 and subsequently increased drastically by 2007. This suggests that during recent years an excess demand for skilled workers may have developed. Within education levels, the largest increases were for tertiary diplomas and university education.

12
# **Indonesia**

Table 4a : Returns to levels of education - Employed for wages

||1994|2007|Change (%)<br>2007-1994|
|---|---|---|---|
|_Basic controls only_||||
|- Primary|0.213|0.242|_13.6_|
|- Junior Sec./primary|0.234|0.128|_-45.3_|
|- Senior Sec./ primary|0.596|0.508|_-14.8_|
|- Tertiary/primary|1.125|1.084|_-3.6_|
|_Basic controls + Industry dummies_||||
|- Primary|0.195|0.243|_25.1_|
|- Junior Sec./primary|0.235|0.126|_-46.4_|
|- Senior Sec./ primary|0.610|0.498|_-18.4_|
|- Tertiary/primary|1.137|1.070|_-5.9_|

||1994|2007|Change (%)<br>2007-1994|
|---|---|---|---|
|_Basic controls only_||||
|- High school general/ primary|0.527|0.486|_-7.8_|
|- High school vocational/ primary|0.663|0.547|_-17.5_|
|- Tertiary/primary|1.123|1.084|_-3.5_|
|_Basic controls + Industry dummies_||||
|- High school general/ primary|0.545|0.479|_-12.1_|
|- High school vocational/ primary|0.678|0.526|_-22.4_|
|- Tertiary/primary|1.139|1.056|_-7.3_|

Table 4b:Returns to skill over time – Employed for wages

||1994|2007|Change (%)<br>2007-1994<br>(2007-1996)|
|---|---|---|---|
|_Basic controls only_||||
|- Upper Sec. and above/ Low sec. and below|0.696|0.683|_-1.9_|
|- At least some tertiary/Secondary and below|0.891|0.849|_-4.7_|
|_Basic controls + Industry dummies_||||
|- Upper Sec. and above/ Low sec. and below|0.677|0.622|_-8.1 (-6.2)_|
|- At least some tertiary/Secondary and below|0.819|0.771|_-5.9 (-2.1)_|

13
# **Philippines**

Table 5a: Returns to levels of education - Employed for wages

||1988|2006|Change (%)<br>2006-1988|
|---|---|---|---|
|_Basic controls only_||||
|- Secondary/primary|0.415|0.492|_18.5_|
|- Tertiary/primary|1.075|1.184|_10.1_|
|_Basic controls + Industry dummies_||||
|- Secondary/primary|0.254|0.201|_-20.9_|
|- Tertiary/primary|0.691|0.593|_-14.1_|

# Table 5b: Returns to skill over time – Employed for wages

||1988|2006|Change (%)<br>2006-1988|
|---|---|---|---|
|_Basic controls only_||||
|- Some Sec. and above/ Primary. and below|0.415|0.492|_18.5_|
|- At least some tertiary/Secondary and below|0.660|0.693|_5.0_|
|_Basic controls + Industry dummies_||||
|- Some Sec. and above/ Primary and below|0.254|0.201|_-20.9_|
|- At least some tertiary/Secondary and below|0.437|0.392|_-10.3_|

14
# **Thailand**

Table 6a: Returns to levels of education - Employed for wages

||1990|2004|Change (%)<br>2004-1990|
|---|---|---|---|
|_Basic controls only_||||
|- Primary|0.301|0.394|_30.9_|
|- Junior Sec./primary|0.374|0.316|_-15.5_|
|- Senior Sec./ primary|0.636|0.603|_-5.2_|
|- Tertiary/primary|1.093|1.289|_17.9_|
|_Basic controls + Industry dummies_||||
|- Primary|0.221|0.253|_14.5_|
|- Junior Sec./primary|0.306|0.214|_-30.1_|
|- Senior Sec./ primary|0.571|0.430|_-24.6_|
|- Tertiary/primary|1.089|1.072|_-1.5_|
||1990|2004|Change (%)<br>2004-1990|
|_Basic controls only_||||
|- High school general/ primary|0.471|0.482|2.3|
|- High school vocational/ primary|0.730|0.719|-1.5|
|- Tertiary/primary|1.097|1.289|17.5|
|_Basic controls + Industry dummies_||||
|- High school general/ primary|0.389|0.327|-15.9|
|- High school vocational/ primary|0.666|0.533|-20.0|
|- Tertiary/primary|1.094|1.078|-1.5|

Table 6b: Returns to skill over time – Employed for wages

||1990|2004|Change (%)<br>2004-1990|
|---|---|---|---|
|_Basic controls only_||||
|- Upper Sec. and above/ Low sec. and below|0.857|0.989|_15.4_|
|-At least some tertiary/Secondary and below|1.074|1.259|_17.2_|
|_Basic controls + Industry dummies_||||
|- Upper Sec. and above/ Low sec. and below|0.846|0.696|_-17.7_|
|- At least some tertiary/Secondary and below|1.056|0.955|_-9.6_|

15
# **Vietnam**

Table 7a: Returns to levels of education - Employed for wages

||1992|2006|Change *<br>2006-1992|
|---|---|---|---|
|_Basic controls only_||||
|- Primary|-0.019|0.094|_0.113_|
|- Junior Sec./primary|-0.172|0.055|_0.227_|
|- Senior Sec./ primary|-0.175|0.210|_0.385_|
|- Tertiary/primary|0.00|0.648|_0.648_|
|_Basic controls + Industry dummies_||||
|- Primary|-0.018|0.080|_0.098_|
|- Junior Sec./primary|-0.167|0.039|_0.206_|
|- Senior Sec./ primary|-0.123|0.195|_0.318_|
|- Tertiary/primary|0.151|0.638|_0.487_|

||1992|2006|Change *<br>2006-1992|
|---|---|---|---|
|_Basic controls only_||||
|- High school general/ primary|-0.040|0.147|_0.187_|
|- High school vocational/ primary|-0.222|0.211|_0.433_|
|- Tertiary/primary|0.023|0.648|_0.625_|
|_Basic controls + Industry dummies_||||
|- High school general/ primary|0.001|0.142|_0.141_|
|- High school vocational/ primary|-0.167|0.187|_0.354_|
|- Tertiary/primary|0.135|0.634|_0.499_|

* Changes rather than percentage changes are given.

Table 7b: Returns to skill over time – Employed for wages

||1992|2006|Change *<br>2006-1992|
|---|---|---|---|
|_Basic controls only_||||
|- Lower Sec. and above/ primary and below|-0.206|0.242|_0.448_|
|- Upper Sec. and above/ Low sec. and below|-0.100|0.414|_0.514_|
|- At least some tertiary/Secondary and below|0.146|0.545|_0.399_|
|_Basic controls + Industry dummies_||||
|- Lower Sec. and above/ primary and below|-0.082|0.170|_0.252_|
|- Upper Sec. and above/ Low sec. and below|0.030|0.276|_0.246_|
|- At least some tertiary/Secondary and below|0.239|0.516|_0.277_|

***** Changes rather than percentage changes are given.

16
# **Cambodia**

Table 8a: Returns to levels of education - Employed for wages

||1997|2007|Change (%)<br>2007-1997|
|---|---|---|---|
|_Basic controls only_||||
|- Primary|0.124|0.330|_166.1_|
|- Junior Sec./primary|0.087|0.265|_204.6_|
|- Senior Sec./ primary|0.129|0.462|_258.1_|
|- Tertiary/primary|0.349|1.097|_214.3_|
|_Basic controls + Industry dummies_||||
|- Primary|0.127|0.173|_36.2_|
|- Junior Sec./primary|0.063|0.128|_103.2_|
|- Senior Sec./ primary|0.119|0.208|_74.8_|
|- Tertiary/primary|0.361|0.761|_110.8_|

# Table 8b: Returns to skill over time – Employed for wages

||1997|2007|Change (%)<br>2007-1997|
|---|---|---|---|
|_Basic controls only_||||
|- Lower Sec. and above/ primary and below|0.174|0.518|_197.7_|
|- Upper Sec. and above/ Low sec. and below|0.154|0.595|_286.4_|
|- At least some tertiary/Secondary and below|0.190|0.939|_394.2_|
|_Basic controls + Industry dummies_||||
|- Lower Sec. and above/ primary and below|0.146|0.256|_75.3_|
|- Upper Sec. and above/ Low sec. and below|0.155|0.301|_94.2_|
|- At least some tertiary/Secondaryand below|0.302|0.630|_108.6_|

17
# **China**

Table 9a: Returns to levels of education - Employed for wages

||1999|2005|Change (%)<br>2005-1999|
|---|---|---|---|
|_Basic controls only_||||
|- Primary|0.095|0.131|_37.9_|
|- Junior Sec./primary|0.054|0.159|_194.4_|
|- Senior Sec./ primary|0.192|0.466|_142.7_|
|- Tertiary/primary|0.607|0.958|_57.8_|
|_Basic controls + Industry dummies_||||
|- Primary|0.108|0.089|_-17.6_|
|- Junior Sec./primary|0.052|0.163|_213.5_|
|- Senior Sec./ primary|0.178|0.468|_162.9_|
|- Tertiary/primary|0.538|0.930|_72.9_|

Table 9b: Returns to skill over time – Employed for wages

||1999|2005|Change (%)<br>2005-1999|
|---|---|---|---|
|_Basic controls only_||||
|- Upper Sec. and above/ Low sec. and below|0.271|0.475|_75.3_|
|- At least some tertiary/Secondary and below|0.454|0.609|_34.1_|
|_Basic controls + Industry dummies_||||
|- Upper Sec. and above/ Low sec. and below|0.239|0.456|_90.8_|
|- At least some tertiary/Secondary and below|0.397|0.578|_45.6_|

18
# **Mongolia**

Table 10a : Returns to levels of education - Employed for wages

||1998*|2002**|2007-8***|Change****<br>1998-2007|
|---|---|---|---|---|
|_Basic controls only_|||||
|Primary|-0.250|0.059|0.116|_0.366_|
|Junior Sec./primary|0.521|0.203|0.290|_-0.231_|
|Senior Sec./ primary|0.603|0.249|0.786|_0.183_|
|Higher Diploma/primary|0.667|0.500|1.306|_0.639_|
|University/primary<br>_Basic controls + Industry dummies_|0.979|0.705|1.387|_0.408_|
|Primary|-0.243|0.074|0.108|_0.351_|
|Junior Sec./primary|0.463|0.195|0.292|_-0.171_|
|Senior Sec./ primary|0.520|0.259|0.776|_0.252_|
|Higher Diploma/primary|0.592|0.524|1.294|_0.702_|
|University/primary|0.896|0.725|1.365|_0.469_|

* Estimates not statistically significant except for university. ** Estimates not statistically significant except for higher diploma and university. *** Estimates are all statistically significant except for primary. ******** Changes rather than percentage changes are given.

||1998|2002|2007-8|Change****<br>1998-2007|
|---|---|---|---|---|
|_Basic controls only_|||||
|High school general/ primary|0.650|0.215|0.743|_0.093_|
|High school vocational/ primary|0.525|0.325|0.874|_0.349_|
|Tertiary/primary|0.854|0.603|1.349|_0.495_|

19
|_Basic controls + Industry dummies_<br>High school general/ primary|0.567|0.223|0.736|_0.169_|
|---|---|---|---|---|
|High school vocational/ primary|0.438|0.335|0.865|_0.427_|
|Tertiary/primary|0.773|0.624|1.332|_0.559_|

***** ***Changes rather than percentage changes are given.

Table 10b: Returns to skill over time – Employed for wages

||1998|2002|2007-8|Change****<br>1998-2007|
|---|---|---|---|---|
|_Basic controls only_|||||
|Upper secondary and above/<br>Lower Secondary and below|0.315|0.264|0.769|_0.454_|
|At least some tertiary/<br>Secondary and below|0.299|0.376|0.701|_0.411_|
|_Industry dummies included_|||||
|Upper secondary and above/<br>Lower Secondary and below|0.280|0.282|0.743|_0.463_|
|At least some tertiary/<br>Secondary and below|0.286|0.392|0.684|_0.398_|

******** Changes rather than percentage changes are given.

20
The charts below (Figures 1 to 7) show the evolution of skill premiums along with the evolution of the proportion of skilled labor –indicating increasing demand for skilled labor in most countries. In Indonesia, while the skilled workforce increased and leveled off after 2003, skill premiums slightly declined after 2000, rebounding moderately by 2007. In the Philippines, against the backdrop of increasing supply of skilled labor, without controlling for industry affiliation the return to skill is showing an increasing trend after 1994. However, after controlling for industry affiliation, the return to skill declined slightly especially after 1997. In Thailand, the significant increases in supply of skilled workers were mirrored with a leveling off and slight decline of the skill premium after 1994, but, overall, skill premiums have been increasing over the long run. For Vietnam, there is evidence of significant excess demand of skilled labor. Premiums have increased sharply throughout the period, starting with negative premiums prior to the reforms. In Cambodia, while supply of skills increased only moderately over the last decade, skill premiums increased sharply between 1997 and 2003 (indicating an excess demand for skilled labor during this period), then leveled off indicating sluggish demand for skilled labor in recent years. In China skill premiums increased sharply in urban areas between 1999 and 2005, despite significant increases in the supply of skilled labor. Finally for Mongolia the charts highlight the sharp rebound of skill premiums in recent years.

21
Figure 1 (a): Indonesia Skill Premiums – basic controls <!-- Start of picture text --> Indonesia: Skill Premium and Skilled Workforce - Basic controls only<br>1<br>0.9<br>0.8 Skilled-1: At least<br>0.7 Upper Secondary<br>0.6 Skilled-2: Tertiary and<br>0.5 above<br>0.4 Skill premium-1<br>0.3<br>0.2 Skill premium-2<br>0.1<br>0<br>1994 1999 2001 2003 2005 2007<br>Year<br>of skilled workforce<br>Skill premium and proportion<br><!-- End of picture text --> Figure 1 (b): Indonesia Skill Premiums – industry controls <!-- Start of picture text --> Indonesia: Skill Premium and Skilled Workforce - With Industry controls<br>0.9<br>0.8<br>Skilled-1: At least<br>0.7<br>Upper Secondary<br>0.6<br>Skilled-2: Tertiary and<br>0.5 above<br>0.4 Skill premium-1<br>0.3<br>0.2 Skill premium-2<br>0.1<br>0<br>1994 1999 2001 2003 2005 2007<br>Year<br>of skilled workforce<br>Skill premium and proportion<br><!-- End of picture text --> 22
# Figure 2 (a): Philippines Skill Premiums – basic controls

<!-- Start of picture text --> Philippines: Skill Premium and Skilled Workforce - Basic controls only<br>0.8<br>0.7<br>0.6 Skilled-1: At least<br> Secondary<br>0.5<br>Skilled-2: Tertiary and<br>0.4 above<br>0.3 Skill premium-1<br>0.2<br>Skill premium-2<br>0.1<br>0<br>1988 1991 1994 1997 2001 2004 2006<br>Year<br>Figure 2 (b): Philippines Skill Premiums – industry controls<br>Philippines: Skill Premium and Skilled Workforce - With Industry<br>controls<br>0.7<br>0.6<br>Skilled-1: At least<br>0.5<br>Secondary<br>0.4 Skilled-2: Tertiary and<br>above<br>0.3<br>Skill premium-1<br>0.2<br>Skill premium-2<br>0.1<br>0<br>1988 1991 1994 1997 2001 2004 2006<br>Year<br>workforce<br>Skill premium and proportion of skilled<br>workforce<br>Skill premium and proportion of skilled<br><!-- End of picture text --> Figure 2 (b): Philippines Skill Premiums – industry controls 23
Figure 3 (a): Thailand Skill Premiums – basic controls <!-- Start of picture text --> Thailand: Skill Premium and Skilled Workforce- Basic controls<br>only<br>1.4<br>1.2<br>Skilled-1: Upper<br>1 Secondary and above<br>0.8 Skilled-2: Tertiary and<br>above<br>0.6<br>Skill Premium-1<br>0.4<br>Skill Premium-2<br>0.2<br>0<br>1990 1994 2000 2004<br>Year<br>Workers<br>Skill Premium and<br>Proportion of Skilled<br><!-- End of picture text --> Figure 3 (b): Thailand Skill Premiums – industry controls <!-- Start of picture text --> Thailand: Skill Premium and Skilled Workforce- With Industry<br>controls<br>1.2<br>1<br>Skilled-1: Upper<br>0.8 Secondary and above<br>Skilled-2: Tertiary and<br>0.6 above<br>Skill Premium-1<br>0.4<br>Skill Premium-2<br>0.2<br>0<br>1990 1994 2000 2004<br>Year<br>Workers<br>Skill Premium and<br>Proportion of Skilled<br><!-- End of picture text --> 24
Figure 4 (a): Vietnam Skill Premiums – basic controls <!-- Start of picture text --> Vietnam: Skill Premium and Skilled Workforce - Basic controls<br>only<br>0.6<br>0.5<br>Skilled-1: At least Upper<br>0.4<br>Secondary<br>0.3 Skilled-2: Tertiary and<br>above<br>0.2<br>Skill Premium-1<br>0.1<br>0<br>Skill Premium-2<br>-0.1 1992 1998 2004 2006<br>-0.2<br>Year<br>workers<br>Skill premium and<br>proportion of skilled<br><!-- End of picture text --> Figure 4 (b): Vietnam Skill Premiums – industry controls <!-- Start of picture text --> Vietnam: Skill Premium and Skilled Workforce - With Industry<br>controls<br>0.6<br>0.5 Skilled-1:Upper<br>Secondary and above<br>0.4<br>Skilled-2: Tertiary and<br>above<br>0.3<br>Skill Premium-1<br>0.2<br>Skill Premium-2<br>0.1<br>0<br>1992 1998 2004 2006<br>Year<br>workers<br>Skill premium and<br>proportion of skilled<br><!-- End of picture text --> 25
Figure 5 (a): Cambodia Skill Premiums – basic controls <!-- Start of picture text --> Cambodia: Skill Premium and Skilled Workforce - Basic<br>controls only<br>1<br>Skilled-1: At least<br>0.9 Lower Secondary<br>0.8 Skilled-2: At least<br>0.7 Upper Secondary<br>0.6 Skilled-3: Tertiary and<br>above<br>0.5<br>Skill Premium-1<br>0.4<br>0.3 Skill Premium-2<br>0.2<br>0.1 Skill Premium-3<br>0<br>1997 2003-4 2007<br>Year<br>workers<br>Skill premium and<br>proportion of skilled<br><!-- End of picture text --> Figure 5 (b): Cambodia Skill Premiums – industry controls <!-- Start of picture text --> Cambodia: Skill Premium and Skilled Workforce - With Industry<br>controls<br>0.8<br>Skilled-1: At least<br>0.7<br>Lower Secondary<br>0.6 Skilled-2: At least<br>Upper Secondary<br>0.5 Skilled-3: Tertiary and<br>above<br>0.4<br>Skill Premium-1<br>0.3<br>Skill Premium-2<br>0.2<br>Skill Premium-3<br>0.1<br>0<br>1997 2003-4 2007<br>Year<br>of skilled workers<br>Skill premium and proportion<br><!-- End of picture text --> 26
Figure 6 (a): China Skill Premiums – basic controls <!-- Start of picture text --> China: Skill Premium and Skilled Workforce - Basic controls<br>only<br>0.7<br>Skilled-1: At least<br>0.6<br>Upper Secondary<br>0.5<br>Skilled-2: Tertiary and<br>0.4 above<br>0.3 Skill Premium-1<br>0.2<br>Skill Premium-2<br>0.1<br>0<br>1999 2005<br>Year<br>of skilled workers<br>Skill premium and proportion<br><!-- End of picture text --> Figure 6 (b): China Skill Premiums – industry controls <!-- Start of picture text --> China: Skill Premium and Skilled Workforce - With Industry<br>controls<br>0.7<br>Skilled-1: At least<br>0.6<br>Upper Secondary<br>0.5<br>Skilled-2: Tertiary and<br>0.4 above<br>0.3 Skill Premium-1<br>0.2<br>Skill Premium-2<br>0.1<br>0<br>1999 2005<br>Year<br>of skilled workers<br>Skill premium and proportion<br><!-- End of picture text --> 27
Figure 7 (a): Mongolia Skill Premiums – basic controls <!-- Start of picture text --> Mongolia: Skill premium and Skilled Workforce - Basic controls<br>only<br>0.9<br>0.8<br>0.7 Skilled1: At least<br>Upper Secondary<br>0.6<br>0.5 Skilled-2: Tertiary and<br>above<br>0.4<br>Skilled Premium-1<br>0.3<br>0.2 Skilled Premium-2<br>0.1<br>0<br>1998 2002 2007<br>Year<br>Figure 7 (b): Mongolia Skill Premiums – industry controls<br>Mongolia: Skill premium and Skilled Workforce - with industry<br>controls<br>0.9<br>0.8 Skilled1: At least<br>Upper Secondary<br>0.7<br>0.6<br>Skilled-2: Tertiary<br>0.5 and above<br>0.4<br>Skilled Premium-1<br>0.3<br>0.2<br>Skilled Premium-2<br>0.1<br>0<br>1998 2002 2007<br>Year<br>skilled workers<br>Skill premium and proportion of<br>skilled workers<br>Skill premium and proportion of<br><!-- End of picture text --> 28
Tables 11a and 11b report changes in wage premiums for selected skill definitions associated to education qualifications. Together with the change in supply of skills, they are revealing of the evolution of excess demand or excess supply of skills over time. There seems to be a divide between three groups of countries: Indonesia, Philippines and Thailand; Vietnam and China; and Cambodia and Mongolia. For the first group of countries, the increase in the supply of skills over time has been very strong and seems to have been accompanied by a slight decrease (Indonesia) or moderate increase in wage skill premiums with only basic controls and a moderate decline in wage skill premiums controlling for industry affiliation. Overall, these trends indicate moderate but still sustained demand for skills, to a large extent driven by industry affiliation in the Philippines and Thailand – that is skills rewards tend to be increasingly industry specific in these two countries.

Table 11a: Percentage change in the return to skill over time with basic controls only

|_Qualification_|Indonesia<br>1994-07|Philippines<br>1988-06|Thailand<br>1990-04|% change<br>Vietnam<br>1992-06|Cambodia<br>1997-07|China<br>1999-05|Mongolia<br>1998-07|
|---|---|---|---|---|---|---|---|
|Lower Sec. and above/|-|-|-|*|197.7|-|-|
|Primary and below||||||||
|Upper Sec. and above/<br>Low sec. and below|-1.9|18.5|15.4|**|286.4|75.3|144.1|
|Tertiary/|-4.7|5.0|17.2|273.2|394.2|34.1|134.4|
|Secondary and below||||||||

* Premium increased sharply from approximately -21% in 1992 to about 24% in 2006.

** Premium increased from -10% in 1992 to about 41% in 2006.

29
Table 11b: Percentage change in the return to skill over time with industry controls

|_Qualification_|Indonesia<br>1994-07<br>(1996-07)|Philippines<br>1988-06|Thailand<br>1990-04|% change<br>Vietnam<br>1992-06|Cambodia<br>1997-07|China<br>1999-05|Mongolia<br>1998-07|
|---|---|---|---|---|---|---|---|
|Lower Sec. and above/|-|-|-|*|75.3|-|-|
|Primary and below||||||||
|Upper Sec. and above/|-8.1|-20.9|-17.7|**|94.2|90.8|<br>165.3|
|Low sec. and below||||||||
|Tertiary/|-5.9|-10.3|-9.6|115.9|108.6|45.6|134.5|
|Secondary and below|(-2.1)|||||||

* Premium increased sharply from approximately -8% in 1992 to about 17% in 2006.

** Premium increased by 9 times from 3% in 1992 to about 28% in 2006.

On the other hand, in the case of Vietnam, Cambodia, Mongolia and China we see much higher increase in wage skill premiums, even after controlling for industry affiliation, combined with increases in the supply of skills over time (Vietnam and China) and a stagnation or decrease (Cambodia and Mongolia). An excess in the demand for skills is the most likely explanation for the trends in China and Vietnam; while shortage of skills is a likely explanation for the trends in Cambodia and Mongolia.

The estimates for Vietnam confirm that Vietnam – a country which has experienced strong growth – has faced constraints to growth due to insufficient skills. The increase in wage premiums over the 1992-2006 period has been striking, especially for tertiary qualifications. The reported increases in wage premiums evolved mostly during the 19982004 period in the case of secondary qualifications and between 1992 and 1998 for tertiary qualifications Education reforms, especially at the higher education level were part of the _Doi Moi_ market oriented reforms of the 1990s in Vietnam. Before the implementation of the reforms, public sector remuneration policy let to a compression of earnings differentials 30
across education groups. The process of dismantling the old public sector wage system began in 1990<sup>3</sup> . Salaries of public servants were to be set according to market rates, and the salary wage structure would reward public sector workers according to education level, job responsibility and performance<sup>4</sup> . The implementation of these reforms led to an increase in the demand for certain types of labor, particularly in trade and services. This resulted in a shortage of high level technical experts, skilled technical workers, administrative and managerial experts and researchers, among others (Nguyen et. al 1991; Sakellariou and Patrinos 2000). As a result of the _Doi Moi_ policies, employment growth was highest in the private sector which absorbed most new labor market entrants and workers let go from the by government and state enterprises.

What we see with respect to the development of education premiums over time in Vietnam is that the increase in premiums is higher the higher the education qualification (Tables A18a-A18d). For example, Senior Secondary and Tertiary premiums quadrupled over the 1992-2006 period, and most of the increase took place in the middle to late 1990s coinciding with the _Doi Moi reforms._ In the case of China, as in the case of Vietnam, premiums increase with higher qualifications. Large increases in premiums are found for Senior Secondary and tertiary education, while the premium of primary education remained approximately constant over the 1999-2005 period.

Despite the similarity in the growth of wage premiums over time between Cambodia and Vietnam, the source of the developments in wage premiums in Cambodia is probably different. Wage premiums exhibited an impressive growth at all levels in Cambodia as was the case in Vietnam. However, in Cambodia, the increases in the return to skill took place during the 1997-2003 period and stagnated thereafter. Overall, with the exception of Tertiary education where we observe a large increase in premiums over time (again

> 3 Remuneration of public sector workers ceased to be based on length of service and jobs were no longer guaranteed for life (Hiebert 1993; Norlund 1993).

> 4 The full impact of these reforms probably came only years later, since those hired prior to 1994 were largely exempted (World Bank 1996).

31
most of it during the 1997-2003 period) despite the doubling of the proportion of workers with tertiary qualifications, only a modest increase in premiums is observed for lower education qualifications, due to the stagnation of premiums after 2003.

The economy of Cambodia did not go into a phase of high growth as was the case in Vietnam. Ridao-Cano (2003) tried to identify key constraints in the development of new sources of economic growth in terms of the supply of skills. Some of the questions addressed are: (i) What is the supply of skills in the labor market; (ii) What is the demand for skilled and educated workers in the labor market; (iii) How adequate is the current supply of skills to the current demand for skills in the labor market - do these reflect a shortage on the supply side or demand side? (iv) Is the current supply of skills a constraint to the development of new sources of growth (as opposed to current sources of growth)? He found that although the current supply of skills is low, there does not appear to be a strong demand for skills in the current labor market, which results in an overall adequacy of skills supplied and skills demanded. The high and increasing estimated returns to schooling in the labor market reflect a shortage in the supply of skills rather than an excess in the demand for skills.

Finally in Mongolia, skill premiums almost tripled over the last decade, mostly due to a sharp increase in recent years. This increase in skill premiums is mainly due to higher premiums for tertiary education; however the increase in skill premiums for other levels of education is also significant. The increase has been accompanied by decreases in the supply of skilled labor.

_4. 3. Evolution of Industry_<sup>_5_</sup> _and Skill Premiums across Countries, Sectors and Time_ Table 12 summarizes the evolution of average industry and skill premiums weighted by industry shares, across countries and time. Equation (1) was estimated, resulting in

> 5 The industry disaggregation varies between countries, depending on whether the industry affiliation variable in the dataset is available at the 1-digit, or 2-digit level, as well as at the cell numbers of useable observations per industry group. For Indonesia and the Philippines industry was available at the 2-digit level. However, in the cases of Thailand, Vietnam, Cambodia and China it was only available at the 1-digit level.

32
estimates of industry and skill coefficients by industry group. The sum of the weighted coefficients of industry and skill for each country are the average premiums for each year. In estimating industry premiums, the excluded group is Agriculture. In estimating skill premiums, the excluded group is unskilled workers irrespectively of industry affiliation.

The interpretation of the industry premium for a particular industry group is the percentage change in the hourly wage from working in that particular industry in comparison to working in Agriculture. The sum of the weighted premiums over the _n-1_ industry premiums for each industry group is a measure of the average industry premium (vs. Agriculture) for that year. For example, in the case of the Philippines, the average industry premium in 1991 was approximately 7.3 percent, with Agriculture being the comparison group.

Similarly, the interpretation of the premium for being a skilled worker (upper secondary or higher / tertiary or higher) within a particular industry group is the percentage change in the hourly wage from being a skilled worker in that particular industry in comparison to being an unskilled worker anywhere. The sum of the _n_ skill premiums is a measure of the average skill premium for that year. For example, in the case of the Philippines, the average skill premium (upper secondary and above) for year 1988 was approximately 26.5 percent in comparison to unskilled workers anywhere, and the average skill premium (tertiary and above) for the same year was just over 40 percent.

Table 12: Industry and Skill Premiums across Countries and Time

|**Mean Wage Premiums**<br>**Stand. Industry Premium:**|Indonesia<br>1994-07|Philippines<br>1988-06|Thailand<br>1990-04|Vietnam<br>1992-06|Cambodia<br>1997-07|China<br>1999-05|Mongolia<br>1998-07|
|---|---|---|---|---|---|---|---|
|**Excluded: Agriculture**|(1996-07)|||||||
|1988||0.085||||||
|1990|||0.481|||||
|1991||0.073||||||
|1992||||-0.033||||
|1994|0.045*|0.098|0.584|||||
|1996|0.156|||||||
|1997|0.108|0.122|||0.086|||
|1998||||-0.15|||0.271|

33
|1999|0.093|||||-0.030||
|---|---|---|---|---|---|---|---|
|2000|||0.734|||||
|2001|0.129|0.226||||||
|2002||||||||
|2003|0.101||||0.385|||
|2004||0.207|0.646|-0.007||||
|2005|-0.008|||||-0.356||
|2006<br>||0.194||-0.011||||
|2007|-0.01||||0.412||0.047|
|_Change in average_|**_-0.055_**|**_0.109_**|**_0.165_**|**_0.022_**|**_0.326_**|**_-0.326_**|**_-0.224_**|
|_Industry Premium_|**_(-0.166)_**|||||||
|**Stand. Skill Wage Premium**||||||||
|**(Secondary and above)****||||||||
|1988||0.265||||||
|1990|||0.837|||||
|1991||0.273||||||
|1992||||-0.044||||
|1994|0.544*|0.245|0.868|||||
|1996|0.604|||||||
|1997|0.619|0.269|||0.091|||
|1998||||0.090|||0.299|
|1999|0.611|||||0.274||
|2000|||0.745|||||
|2001|0.647|0.258||||||
|2002||||||||
|2003|0.584||||0.324|||
|2004||0.276|0.662|0.289||||
|2005|0.607|||||0.479||
|2006||0.296||0.281||||
|2007|0.650||||0.270||0.714|
|_Change in average_|**_0.106_**|**_0.031_**|**_-0.175_**|**_0.325_**|**_0.179_**|**_0.205_**|**_0.415_**|
|_Skill Premium_|**_(0.046)_**|||||||
|**Stand. Skill Wage Premium**||||||||
|<br>**(Tertiary and above)*****||||||||
|<br>1988||0.414||||||
|1990|||1.087|||||
|1991||0.406||||||
|1992||||0.229||||
|1994|0.769*|0.381|1.248|||||
|1996|0.803|||||||
|1997|0.865|0.402|||0.204|||
|1998||||0.266|||0.281|
|1999|0.748|||||0.412||
|2000|||1.232|||||
|2001|0.730|0.378||||||
|2002||||||||
|2003|0.721||||0.455|||
|2004||0.390|1.088|0.474||||
|2005|0.694|||||0.583||

34
|2006||0.377||0.569||||
|---|---|---|---|---|---|---|---|
|2007|0.810||||0.275||0.701|
|_Change in average_|**_0.040_**|**_-0.037_**|**_0.00_**|**_0.34_**|**_0.071_**|**_0.171_**|**_0.420_**|
|_Skill Premium_|**_(0.007)_**|||||||

*The industry variable in the 1994 Sakernas is at the one-digit level;** Lower secondary and above for Cambodia; *** Upper secondary and above for Cambodia.

In Indonesia, the evolution of industry premiums over time suggests that the premium of belonging to an industry other than Agriculture has declined substantially over time, and has turned in favor of Agriculture sometime after 2003. In the Philippines, Thailand and Cambodia the opposite was the case; industry premiums increased over time and the proportional increase was largest in the case of Cambodia (premiums increased fivefold), followed by the Philippines. For the Philippines, most of the increase took place sometime between 1998 and 2001 and for Cambodia sometime between 1998 and 2003. In the case of Vietnam, small premiums in favor of Agriculture were observed over the entire period. In China, the reward of being in an industry other than Agriculture has declined sharply over time.<sup>6</sup> In Mongolia, the premium of belonging to an industry other than Agriculture has declined substantially over time.

The results on skill premiums confirm the previous country grouping, with generally stable premiums for Indonesia, Philippines and Thailand, and increasing ones for the other countries. Average skill premiums in Indonesia, for both definitions, remained fairly stable, exhibiting only a small increase over time during the 1996-2007 period (i.e., discarding 1994), especially for those with tertiary education. This was also the case for the Philippines were practically no change is observed. This finding for the Philippines is somewhere in-between what was reported in table 10a (no controls for industry affiliation) and table 10b (with controls for industry affiliation) where declines in skill premiums of 20 and 10 percent respectively are reported for those with at least some senior secondary and tertiary qualifications.

> 6 Note that, the data are for urban populations and, therefore, the agricultural sector is very small in comparison to the other countries examined.

35
In Thailand, using the first definition of skilled workers (senior secondary education and above), average skill premiums declined over time by about 20 percent (mostly after 1994), while using the second definition skilled premiums remained unchanged. These results for Thailand are based on regressions which included 1-digit industry affiliations and the sample of all members of the household. When the alternative sample of heads of household only was used (a significantly older group of workers) which allowed for 2- digit industry affiliations, average standardized skill premiums show a decline for both definitions (more using the first definition of skill).

The results for Vietnam indicate a spectacular increase in skill premiums over time, consistent with other findings for Vietnam in this report. At the beginning of the period (1992), and before the _Doi Moi_ reforms impacted the labor market, average skill premiums were actually negative (secondary and above) or indicated a small skill premium (tertiary qualifications). Subsequently, skill premiums increased monotonically. Most of the increase took place between 1998 and 2004 (secondary and above) and between 2004 and 2006 (tertiary).

In the case of Cambodia the two definitions of skill are Lower Secondary and above and Senior Secondary and above<sup>7</sup> . Between 1997 and 2003-4, large increases in average skill premiums are observed in Cambodia for both skill definitions. Premiums more than tripled (lower secondary and above) and more than doubled (senior secondary and above). However, premiums seem to have declined somewhat subsequently, this possibly reflecting data comparability issues between the 2007 and earlier surveys. Overall, skill premiums tripled (lower secondary and above definition) / displayed a moderate increase (senior secondary or higher definition).

In China, average skill premiums have increased substantially over the 1999-2005 period (second only to Mongolia and Vietnam). Finally in Mongolia, skill premiums for both

> 7 This is because the proportion of workers with university education is small, making it difficult to estimate coefficients of skill within certain industry groups.

36
definitions of skill increased more than any other country in the group, tripling over the last decade.

With respect to the question of whether industry premiums or skill premiums changed more over time, the evidence from Table 12 is mixed: in the Philippines and Cambodia industry premiums changed more than skill premiums –suggesting that they are the main driver of wage differentials; in Thailand, Mongolia and China we observe significant changes in both industry and skill premiums which go in opposite directions – skill premiums are confirmed to be the main wage driver in China and Mongolia, while industry premiums are the main driver in Thailand; in Vietnam we see a spectacular increase in skill premiums and hardly any increase in industry premiums; finally in Indonesia the answer depends on whether we compare over the 1994-2007 or the 19962007 period and on the skill definition used.

Table 13 reports estimates of the variance of industry and skill premiums over time. Overall, dispersion of industry premiums for Indonesia, Vietnam, China and Mongolia remained low with little tendency for change, while it increased sharply over time for Cambodia and moderately for the Philippines and Thailand. The variance levels as well as their evolution would seem to indicate that labor markets are more segmented in Cambodia, Thailand and Philippines than elsewhere (noting the evidence above on countries with faster rising industry premiums), pointing to the need for focusing on policies that make labor markets less segmented. An open question for Thailand and the Philippines – which show both evidence of raising industry premiums and increasingly industry-specific skill premiums over the long-run – is to what extent industry-specific skill premiums are associated with higher overall industry premiums in the most skilled intensive sectors or correspond to “real” variation in skill premiums across sectors. The variance and sector analysis of skill premiums provided below will help clarify this issue.

With respect to the dispersion of skill premiums, the dispersion for Cambodia, China and Mongolia remained very low with no significant change over time for both definitions of skill. The dispersion of skill premiums increased for the first definition of skill in the case 37
of the Philippines (mostly after 2000), but remained broadly stable for the second definition of skill (tertiary and above); showed an overall increase in Indonesia (once year 1994 is discarded) for the first definition of skill and a small decrease for the second definition of skill, after increasing until 2001 and declining thereafter; in Thailand we observe a significant increase in the dispersion of premiums for tertiary education during the early 1990s (but remained unchanged during the 1994-2004 period), but a small decrease in dispersion for senior secondary and above. A notable observation is the sharp decline in the dispersion of tertiary education premiums in Vietnam, which declined continuously after 1992 (while the dispersion of premiums for senior secondary and above remained stable). Overall, the low variance magnitudes and decrease or stability in time in most countries make it clear that investing in general curriculum makes more sense than investing in too specific curricula since demand for skills is not very sector specific. The sector specificity of demand for skills, while a bit higher, has decreased sharply over time in Vietnam pointing to the need for more general education. Where demand for skills has become a bit more sector specific in time is in the Philippines (overall), Thailand (tertiary and above) and Indonesia (secondary and above). These results are broadly aligned with the above evidence which shows lower overall skill premiums after industry affiliation is controlled for in the Philippines and Thailand, and lower premiums for upper secondary education after industry affiliation is controlled for in Indonesia. They also confirm the differentiation of skill premiums across sectors in the Philippines and Thailand – beyond possible industry premiums effects. Overall, these results suggest that there may be more ground for incorporating specific elements in the general curricula of Indonesia, the Philippines and Thailand. The analysis by sector presented below will provide more guidance on the direction of these changes.

38
Table 13: Variance of Industry and Skill Premiums across Countries and Time

|**Variance:**<br>**Industry Premiums**|Indonesia<br>1994-07<br>|Philippines<br>1988-06|Thailand<br>1990-04|Vietnam<br>1992-06|Cambodia<br>1997-07|China<br>1999-05|Mongolia<br>1998-2007|
|---|---|---|---|---|---|---|---|
||(1996-07)|||||||
|1988<br>||0.050||||||
|1990|||0.158|||||
|1991||0.051||||||
|1992||||0.016||||
|1994|0.004*|0.036|0.212|||||
|1996|0.011|||||||
|1997|0.010|0.063|||0.008|||
|1998||||0.019|||0.016|
|1999|0.009|||||0.018||
|2000|||0.276|||||
|2001|0.012|0.079||||||
|2002||||||||
|2003|0.009||||0.076|||
|2004||0.076|0.196|0.016||||
|2005|0.013|||||0.021||
|2006||0.082||0.013||||
|2007|0.008||||0.121||0.009|
|_Change in Variance_|**0.004**<br>**_(-0.003)_**|**_0.032_**|**_0.038_**|**_-0.003_**|**_0.113_**|**_0.003_**|**_-0.007_**|
|**Variance:**||||||||
|**Skill Premiums**||||||||
|**(Secondary and above)****||||||||
|1988||0.026||||||
|1990|||0.064|||||
|1991||0.025||||||
|1992||||0.061||||
|1994|0.017*|0.019|0.032|||||
|1996|0.047|||||||
|1997|0.047|0.024|||0.008|||
|1998||||0.101|||0.031|
|1999|0.053|||||0.020||
|2000|||0.026|||||
|2001|0.101|0.035||||||
|2002||||||||
|2003|0.083||||0.034|||
|2004||0.048|0.036|0.023||||
|2005|0.060|||||0.012||
|2006||0.047||0.051||||
|2007|0.071||||0.016||0.043|
|_Change in Variance_|**_0.054_**|**_0.021_**|**_-0.028_**|**_-0.010_**|**_0.008_**|**_-0.008_**|**_0.012_**|
||**_(0.024)_**|||||||
|**Variance:**||||||||
|**Skill Premiums**||||||||
|**(Tertiary and above)*****||||||||
|1988||0.008||||||

39
|1990|||0.032|||||
|---|---|---|---|---|---|---|---|
|1991||0.008||||||
|1992||||0.274||||
|1994|0.038|0.007|0.071|||||
|1996|0.045|||||||
|1997|0.062|0.010|||0.177|||
|1998||||0.133|||0.011|
|1999|0.046|||||0.009||
|2000|||0.079|||||
|2001|0.036|0.011||||||
|2002||||||||
|2003|0.035||||0.043|||
|2004||0.011|0.078|0.023||||
|2005|0.023|||||0.014||
|2006||0.010||0.011||||
|2007|0.017||||0.171||0.019|
|_Change in Variance_|**_-0.021_**<br>**_(-0.028)_**|**_0.002_**|**_0.046_**|**_-0.263_**|**_-0.006_**|**_0.007_**|**_0.008_**|

*The industry variable in the 1994 Sakernas is at the one-digit level; ** Lower secondary and above for Cambodia; *** Upper secondary and above for Cambodia.

Table 14: Evolution of Skill Premiums by Sector and Country

|||Indonesia|Philippines|Thailand|Vietnam|Cambodia|China|Mongolia|
|---|---|---|---|---|---|---|---|---|
|_Seni_|_or Sec. or higher_||||||||
|198|8||||||||
|-|Agriculture/Mining||0.192||||||
|-|Manufacturing||0.343||||||
|-|Trade/Services||0.539||||||
|199|0||||||||
|-|Agriculture/Mining|||1.812|||||
|-|Manufacturing|||0.642|||||
|-|Trade/Services|||0.969|||||
|199|1||||||||
|-|Agriculture/Mining||0.186||||||
|-|Manufacturing||0.322||||||
|-|Trade/Services||0.560||||||
|199|2||||-0.586||||
|-|Agriculture/Mining||||-0.102||||
|-|Manufacturing||||-0.237||||
|-|Trade/Services||||||||
|199|4||||||||
|-|Agriculture/Mining|0.809|0.161|1.148|||||
|-|Manufacturing|0.419|0.301|0.665|||||
|-|Trade/Services|0.722|0.469|1.065|||||
|199|7||||||||
|-|Agriculture/Mining||0.204|||-0.263|||
|-|Manufacturing||0.255|||0.115|||
|-|Trade/Services||0.511|||0.190|||

40
|1998||||||||
|---|---|---|---|---|---|---|---|
|-<br>Agriculture/Mining||||-0.243|||0.381|
|<br>-<br>Manufacturing||||0.00|||0.266|
|-<br>Trade/Services||||0.00|||0.280|
|1999<br>||||||||
|-<br>Agriculture/Mining<br>|0.634<br>|||||0.454<br>||
|-<br>Manufacturing|0.375|||||0.165||
|-<br>Trade/Services|0.689|||||0.348||
|2000||||||||
|-<br>Agriculture/Mining|||0.898|||||
|-<br>Manufacturing|||0.644|||||
|-<br>Trade/Services|||0.990|||||
|2001||||||||
|- Agriculture/Mining||0.140||||||
|- Manufacturing||0.197||||||
|- Trade/Services||0.621||||||
|2002||||||||
|-<br>Agriculture/Mining||||||||
|-<br>Manufacturing|||||||0.388|
|-<br>Trade/Services|||||||0.371|
|2003|||||||0.296|
|-<br>Agriculture/Mining|0.551||0.571||0.262|||
|<br>-<br>Manufacturing|0.394||0.642||0.225|||
|<br>-<br>Trade/Services|0.689||0.811||0.516|||
|2004||||||||
|-<br>Agriculture/Mining||0.145||0.208||0.301||
|<br>-<br>Manufacturing||0.189||0.328||0.380||
|-<br>Trade/Services||0.609||0.463||0.541||
|2005||||||||
|-<br>Agriculture/Mining||||||||
|-<br>Manufacturing||||||||
|<br>-<br>Trade/Services||||||||
|2006||||||||
|-<br>Agriculture/Mining||0.122||0.410|0.157|||
|-<br>Manufacturing||0.201||0.232|0.156|||
|-<br>Trade/Services||0.698||0.249|0.541|||
|2007||||||||
|-<br>Agriculture/Mining|0.605||||||1.025|
|-<br>Manufacturing|0.463||||||0.631|
|-<br>Trade/Services|0.734||||||0.833|
|_Tertiary or higher_||||||||
|<br>1988||||||||
|- Agriculture/Mining||0.364||||||
|<br>- Manufacturing||0.497||||||
|- Trade/Services||0.726||||||
|1990||||||||

41
|-<br>Agriculture/Mining|||2.010|||||
|---|---|---|---|---|---|---|---|
|-<br>Manufacturing|||1.182|||||
|-<br>Trade/Services|||1.048|||||
|1991<br>||||||||
|- Agriculture/Mining<br>||0.355<br>||||||
|- Manufacturing||0.387||||||
|- Trade/Services||0.742||||||
|1992||||||||
|-<br>Agriculture/Mining||||-0.233||||
|-<br>Manufacturing||||0.084||||
|-<br>Trade/Services||||-0.050||||
|1994||||||||
|-<br>Agriculture/Mining|1.432|0.336|2.436|||||
|-<br>Manufacturing|1.075|0.405|1.190|||||
|<br>-<br>Trade/Services|0.770|0.644|1.067|||||
|1997|||||-|||
|-<br>Agriculture/Mining||0.405|||-0.677|||
|<br>-<br>Manufacturing||0.389|||0.325|||
|-<br>Trade/Services||0.715||||||
|1998||||||||
|-<br>Agriculture/Mining||||0.304|||0.382|
|<br>-<br>Manufacturing||||0.382|||0.259|
|<br>-<br>Trade/Services||||0.191|||0.289|
|1999||||||||
|-<br>Agriculture/Mining|1.128|||||0.356||
|<br>-<br>Manufacturing|0.797|||||0.318||
|-<br>Trade/Services|0.691|||||0.475||
|2000||||||||
|-<br>Agriculture/Mining|||2.051|||||
|-<br>Manufacturing|||1.070|||||
|-<br>Trade/Services|||1.003|||||
|2001||||||||
|- Agriculture/Mining||0.350||||||
|- Manufacturing||0.339||||||
|- Trade/Services||0.769||||||
|2002||||||||
|-<br>Agriculture/Mining|||||||0.519|
|-<br>Manufacturing|||||||0.400|
|-<br>Trade/Services|||||||0.287|
|2003|||||-|||
|-<br>Agriculture/Mining|0.976||1.487||0.423|||
|-<br>Manufacturing|0.752||1.077||0.601|||
|-<br>Trade/Services|0.678||0.97|||||
|<br>2004||||||||
|-<br>Agriculture/Mining||0.354||0.503||0.497||
|<br>-<br>Manufacturing||0.301||0.517||0.477||
|-<br>Trade/Services||0.752||0.594||0.655||
|2005||||||||
|-<br>Agriculture/Mining||||||||

42
|-<br>Manufacturing||||||
|---|---|---|---|---|---|
|<br>-<br>Trade/Services||||||
|2006||||||
|-<br>Agriculture/Mining|||0.384|||
|<br>-<br>Manufacturing|||0.377|||
|<br>-<br>Trade/Services|||0.547|||
|2007||||||
|-<br>Agriculture/Mining|1.213|0.303||-|0.868|
|<br>-<br>Manufacturing|0.903|0.328||1.045*|0.560|
|<br>-<br>Trade/Services|0.787|0.809||0.843|0.742|

* Not statistically significant.

Table 14 and the charts that follow (Figures 8 to 14) show the evolution of return to skill over time by major sector in relation to the evolution of the supply of skilled workers by major sector. Overall, there is indeed some evidence that the evolution of skill premiums has been rather sector specific in Indonesia, Philippines and Thailand (with generally decreasing returns in agriculture, mixed performance in manufacturing, and increasing in services (Indonesia and the Philippines)), while more evident across the board (with an edge for the service sector) in the other countries. The dynamism of the demand in the service sector in most countries points to the importance of ensuring a better tailoring of curriculum design and pedagogical approaches to its needs (all the more in countries such as Indonesia and the Philippines where demand in other sectors has been sluggish).

In Indonesia there was a steady increase in the proportion of skilled workers, especially in trade/services, which leveled of after 2003 in agriculture/mining and manufacturing. Return to skill was declining in agriculture/mining and for those with secondary or higher education in manufacturing until 2003, rebounding thereafter. The return to skill in trade/services remained steady or even slightly increased over the entire period despite the steady increase in the supply of skilled workers in this sector.

In the Philippines, the evidence shows clear patterns of declining skill premiums in agriculture and manufacturing and increasing in services. Together with increasing proportion of skilled workers, this evidence suggests increased demand for skills in the service sector.

43
In Thailand, there has been a sharp decline in the return to skill in agriculture/minining between 1990 and 2004. On the other hand, the return to skill in the other two major sectors remained roughly unchanged with a slight declining tendency. This is in the backdrop of significant increases in the proportion of skilled workers in manufacturing after 1994 and modest increases in the other two major sectors.

In Vietnam, the return to skill in all sectors increases sharply until 2004 (and more so in agriculture), while the corresponding supply of skills showed a declining trend in agriculture/mining, increased moderately in manufacturing and more sharply in trade/services between 2004 and 2006.

In Cambodia, the proportion of workers with senior secondary and above education declined in agriculture/mining and manufacturing, while it increased in trade/services. The corresponding returns increased sharply between 1997 and 2003-4 and leveled off thereafter. On the other hand, the proportion of workers with tertiary education (which is virtually non-existent in agriculture/mining) increased sharply in trade/services and less so in manufacturing. The sharp increase in the return to tertiary education in manufacturing between 2003-4 and 2007 is indicative of an excess demand for tertiary educated workers in this sector. The return to tertiary skills in trade/services showed a steady increase over the last decade despite the large increase in the supply of tertiary educated workers.

In urban China, with the exception of agriculture/mining (which by 2005 accounted for less that 1% of the workforce in the urban areas), the return to both types of skills increased significantly, in the backdrop of significant increases in the supply of such skills.

Finally, in Mongolia, returns to skill increased significantly for all major sectors, especially for agriculture and services; during the time period the supply of tertiary education skills decreased for the sample of workers examined.

44
<!-- Start of picture text --> Figure 8(a): Indonesia: Return to skill by sector over time (Senior<br>Secondary and above)<br>1<br>0.8<br>0.6 Agriculture/Mining<br>0.4 Manufacturing<br>Trade/Services<br>0.2<br>0<br>1994 1999 2003 2007<br>Year<br>Return<br><!-- End of picture text -->

**Figure 8(b): Indonesia: Proportion of skilled workers by sector over time (Senior Secondary and above)**

<!-- Start of picture text --> 80<br>70<br>60<br>50<br>Agriculture/Mining<br>40<br>Manufacturing<br>30<br>20 Trade/Services<br>10<br>0<br>1994 1999 2003 2007<br>Year<br>% skilled<br><!-- End of picture text --> 45
**Figure 8(c): Indonesia: Return to skill by sector over time (Tertiary and above)**

<!-- Start of picture text -->
1.6<br>1.4<br>1.2<br>1<br>Agriculture/Minin<br>0.8<br>g<br>Manufacturing<br>0.6<br>0.4 Trade/Services<br>0.2<br>0<br>1994 1999 2003 2007<br>Year<br>Return<br><!-- End of picture text -->

**Figure 8(d): Indonesia: Proportion of skilled workers by sector over time (Tertiary and above)**

<!-- Start of picture text --> 35<br>30<br>25<br>20<br>Agriculture/Minin<br>15 g<br>Manufacturing<br>10<br>Trade/Services<br>5<br>0<br>1994 1999 2003 2007<br>Year<br>% skilled<br><!-- End of picture text --> 46
# **Figure 9(a): Philippines: Return to skill by sector over time (Secondary and above)**

<!-- Start of picture text --> 0.8<br>0.7<br>0.6<br>0.5<br>Agriculture/Minin<br>0.4<br>g<br>0.3 Manufacturing<br>0.2<br>T d /S i<br>0.1<br>0<br>1988 1994 2001 2006<br>Return<br><!-- End of picture text -->

**Year**

**Figure 9(b): Philippines: Proportion of skilled workers by sector over time (Secondary and above)**

<!-- Start of picture text --> 1<br>0.8<br>0.6<br>Agriculture/Minin<br>0.4 g<br>Manufacturing<br>0.2 Trade/Services<br>0<br>1988 1994 2001 2006<br>Year<br>% skilled<br><!-- End of picture text --> 47
<!-- Start of picture text --> Figure 9(c): Philippines: Return to skill by sector over time<br>0.9 (Tertiary and above)<br>0.8<br>0.7<br>0.6<br>0.5<br>Agriculture/Mining<br>0.4<br>Manufacturing<br>0.3<br>Trade/Services<br>0.2<br>0.1<br>0<br>1988 1994 2001 2006<br>Year<br>Return<br><!-- End of picture text -->

**Figure 9(d): Philippines: Proportion of skilled workers by sector over time (Tertiary and above)**

<!-- Start of picture text --> 0.5<br>0.4<br>0.3<br>Agriculture/Minin<br>g<br>0.2<br>Manufacturing<br>0.1<br>Trade/Services<br>0<br>1988 1994 2001 2006<br>Year<br>% skilled<br><!-- End of picture text --> 48
# **Figure 10(a): Thailand: Return to skill by sector over time (Senior Secondary and above)**

<!-- Start of picture text --> 2<br>1.8<br>1.6<br>1.4<br>1.2<br>Agriculture/Mining<br>1<br>Manufacturing<br>0.8<br>0.6 Trade/Services<br>0.4<br>0.2<br>0<br>1990 1994 2000 2004<br>Return<br><!-- End of picture text -->

**Year**

**Figure 10(b): Thailand: Proportion of skilled workers by sector over time (Senior Secondary and above)**

<!-- Start of picture text --> 45<br>40<br>35<br>30<br>25 Agriculture/Mining<br>20 Manufacturing<br>15<br>Trade/Services<br>10<br>5<br>0<br>1990 1994 2000 2004<br>% skilled<br><!-- End of picture text -->

**Year**

49
**Figure 10(c):Thailand: Return to skill by sector over time (Tertiary and above)**

<!-- Start of picture text --> 3<br>2.5<br>2<br>1.5 Agriculture/Mining<br>1 Manufacturing<br>Trade/Services<br>0.5<br>0<br>1990 1994 2000 2004<br>Return<br><!-- End of picture text -->

**Year**

**Figure 10(d): Thailand: Proportion of skilled workers by sector over time (Tertiary and above)**

<!-- Start of picture text --> 25<br>20<br>15 Agriculture/Mining<br>Manufacturing<br>10<br>Trade/Services<br>5<br>0<br>1990 1994 2000 2004<br>% skilled<br><!-- End of picture text -->

**Year**

50
# **Figure 11(a): Vietnam: Return to skill by sector over time (Senior Secondary and above)**

<!-- Start of picture text --> 0.6<br>0.4<br>0.2<br>Agriculture/Mining<br>0<br>1992 1998 2004 2006 Manufacturing<br>-0.2<br>Trade/Services<br>-0.4<br>-0.6<br>-0.8<br>Return<br><!-- End of picture text -->

**Year**

**Figure 11(b): Vietnam: Proportion of skilled workers by sector over time (Senior Secondary and above)**

<!-- Start of picture text --> 50<br>40<br>30 Agriculture/Mining<br>Manufacturing<br>20<br>Trade/Services<br>10<br>0<br>1990 1998 2004 2006<br>% skilled<br><!-- End of picture text -->

**Year**

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<!-- Start of picture text --> Figure 11(c): Vietnam: Return to skill by sector over time (Tertiary and<br>above)<br>1<br>0.8<br>0.6<br>0.4<br>Agriculture/Minin<br>0.2 g<br>Manufacturing<br>0<br>Trade/Services<br>-0.2 1992 1998 2004 2006<br>-0.4<br>Return<br><!-- End of picture text -->

**Year**

**Figure 11(d): Vietnam: Proportion of skilled workers by sector over time (Tertiary and above)**

<!-- Start of picture text --> 25<br>20<br>15 Agriculture/Mining<br>10 Manufacturing<br>Trade/Services<br>5<br>0<br>1990 1998 2004 2006<br>Year<br>% skilled<br><!-- End of picture text --> 52
# **Figure 12(a): Cambodia: Return to skill by sector over time (Senior Secondary and above)**

<!-- Start of picture text --> 0.6<br>0.4<br>0.2 Agriculture/Mining<br>Manufacturing<br>0<br>Trade/Services<br>1997 2003-4 2007<br>-0.2<br>-0.4<br>Return<br><!-- End of picture text -->

**Year**

**Figure 12(b): Cambodia: Proportion of skilled workers by sector over time (Senior Secondary and above)**

<!-- Start of picture text --> 35<br>30<br>25<br>20 Agriculture/Mining<br>15 Manufacturing<br>10 Trade/Services<br>5<br>0<br>1997 2003-4 2007<br>Year<br>% skilled<br><!-- End of picture text --> 53
**Figure 12(c): Cambodia: Return to skill by sector over time Tertiary and above)**

<!-- Start of picture text -->
1.5<br>1<br>0.5<br>*<br>0<br>Manufacturing<br>1997 2003-4 2007<br>-0.5 Trade/Services<br>-1<br>Return<br><!-- End of picture text -->

**Year**

- Not enough observations.

**Figure 12(d): Cambodia: Proportion of skilled workers by sector over time (Tertiary and above)**

<!-- Start of picture text --> 16<br>14<br>12<br>10 *<br>8<br>Manufacturing<br>6<br>Trade/Services<br>4<br>2<br>0<br>1997 2003-4 2007<br>Year<br>% skilled<br><!-- End of picture text -->

- Not enough observations.

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# **Figure 13(a): China: Return to skill by sector over time (Senior Secondary and above)**

<!-- Start of picture text --> 0.6<br>0.5<br>0.4 Agriculture/Mining<br>0.3 Manufacturing<br>Trade/Services<br>0.2<br>0.1<br>0<br>1999 2005<br>Return<br><!-- End of picture text -->

**Year**

**Figure 13(b): China: Proportion of skilled labor by sector over time (Senior Secondary and above)**

<!-- Start of picture text --> 80<br>70<br>60<br>Agriculture/Mining<br>50<br>40 Manufacturing<br>30 Trade/Services<br>20<br>10<br>0<br>1999 2005<br>% skilled<br><!-- End of picture text -->

**Year**

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**Figure 13(c): China: Return to skill by sector over time (Tertiary and above)**

<!-- Start of picture text --> 0.7<br>0.6<br>0.5<br>0.4 Agriculture/Minin<br>0.3 g<br>Manufacturing<br>0.2<br>Trade/Services<br>0.1<br>0<br>1999 2005<br>Return<br><!-- End of picture text -->

**Year**

**Figure 13(d): China: Proportion of skilled labor by sector over time (Tertiary and above)**

<!-- Start of picture text --> 40<br>35<br>30<br>25<br>20<br>15<br>10<br>5<br>0<br>1999 2005<br>Year<br>% skilled<br><!-- End of picture text --> <!-- Start of picture text --> Agriculture/Mining<br>Manufacturing<br>Trade/Services<br><!-- End of picture text --> 56
# **Figure 14(a): Mongolia: Return to skill by sector over time (Senior Secondary and above)**

<!-- Start of picture text -->
1.2<br>1<br>0.8 Agriculture/Mining<br>0.6 Manufacturing<br>Trade/Services<br>0.4<br>0.2<br>0<br>1998 2002 2007<br>Year<br>Return<br><!-- End of picture text -->

**Figure 14(b): Mongolia: Proportion of skilled labor by sector over time (Senior Secondary and above)**

<!-- Start of picture text --> 100<br>80<br>Agriculture/Mining<br>60<br>Manufacturing<br>40<br>Trade/Services<br>20<br>0<br>1998 2002 2007<br>Year<br>% skilled<br><!-- End of picture text --> 57
<!-- Start of picture text --> Figure 14(c): Mongolia: Return to skill by sector over time (Tertiary<br>and above)<br>1<br>0.8<br>0.6<br>Agriculture/Mining<br>0.4<br>Manufacturing<br>0.2 Trade/Services<br>0<br>1998 2002 2007<br>Year<br>Return<br><!-- End of picture text -->

**Figure 14(d): Mongolia: Proportion of skilled labor by sector over time (Tertiary and above)**

<!-- Start of picture text --> 60<br>50<br>40 Agriculture/Mining<br>Manufacturing<br>30<br>Trade/Services<br>20<br>10<br>0<br>1998 2002 2007<br>Year<br>% skilled<br><!-- End of picture text --> 58
The Charts (Figures 15 to 21) which follow show the changes in the un-standardized weighted industry and skill (senior secondary and above) premiums by industry affiliation. The above findings are generally confirmed with clear evidence of increases in industry premiums compared to Agriculture in the Philippines, Thailand and Cambodia – suggesting possibility of labor market segmentation; significant increases in skill premiums in most service sub-sectors in all countries (with the exception of Thailand); and increases in skill premiums across most sub-sectors in Vietnam, Cambodia, China and Mongolia.

Changes in industry premiums are interpreted in relation to the excluded industry, which is agriculture. In Indonesia, generally, industry premiums moved in favor of agriculture, while premiums for other groups generally declined. Un-standardized skill premiums on the other hand indicate a mixed pattern, with the skill premium for agriculture and construction declining over time (in relation to unskilled), while it increased for other industries, especially Trade and Services. In the Philippines, industry premiums generally increased compared to agriculture (with the exception of household employment). Skill premiums show a mixed pattern over time, generally declining in agriculture and manufacturing, but raising for most services (with the notable exception of financial services, health and social work and private household employment<sup>8</sup> ). In Thailand, industry premiums generally increased over time compared to agriculture especially for trade and services. On the other hand, standardized skill premiums decreased in agriculture and services and increased in manufacturing and trade. In Vietnam, increasing industry premiums are found for services and construction and decreasing for foodbeverages-tobacco, textiles, wood-furniture and trade. Skill premiums generally increased across the board, especially in agriculture and services. In Cambodia, industry premiums increased compared to agriculture for all industries except trade. Similarly, skill premiums increased for all industries except in trade. In Mongolia, industry premiums decreased compared to agriculture, and skill premiums increased across the board (except for public administration). Finally in China, industry premiums generally decreased

> 8 When considering a definition of tertiary and more, however, skill premiums are on the rise for insurance and real estate, important parts of the financial services sub-sector.

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compared to agriculture, while skill premiums increased in trade, services and, to a lower extent, manufacturing, and slightly decreased in agriculture and utilities.

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1. Agriculture 2. Forestry 3. Fishery 4. Mining-Minerals 5. Metal ore-Other Mining 6. FoodDrinks- Tobacco 7. Textile 8. Timber and Furniture 9. Paper and Printing 10. Chemicals 11. NonMetallic production 12. Metal industry 13. Other industry 14. Utilities 15. Construction 16. Wholesale trade 17. Retail trade 18. Transportation/Communication 19. Finance-Real Estate 20. Public Admin-Health-Other Services.

**Figure 15: Indonesia-Change in un-standardized weighted industry and skill premium by sector: 1996-2007**

<!-- Start of picture text --> 0.04<br>0.03<br>0.02<br>0.01<br>0<br>-0.01 1 3 5 7 9 11 13 15 17 19 Change in Ind Premium<br>-0.02 Change in Skill premium<br>-0.03<br>-0.04<br>-0.05<br>-0.06<br>Industry<br>Change<br><!-- End of picture text --> 61
1. Growing crops 2. Fishing 3. Non-metal mining 4. Food-Beverages-Tobacco 5. Textiles 6. WoodFurniture 7. Paper products 8. Chemicals 9. Utilities 10. Construction 11. Wholesale trade 12. Retail trade 13. Hotels-Restaurants 14. Transportation 15. Financial services 16. Business services 17. Public Admin. 18. Education 19. Health and Social Work 20. Private household employment.

**Figure 16: Philippines- Change in un-standardized weighted industry and skill premium by sector: 1988-2006**

<!-- Start of picture text --> 0.4<br>0.3<br>0.2<br>0.1<br>0<br>Change in Industry<br>-0.1 1 3 5 7 9 11 13 15 17 19 21 premium<br>-0.2 Change in Skill<br>premium<br>-0.3<br>-0.4<br>-0.5<br>Change<br><!-- End of picture text -->

**Industry**

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1. Agriculture 2. Mining 3. Manufacturing 4. Utilities 5. Construction  6. Trade 7. Transportation 8. Other services.

<!-- Start of picture text --> Figure 17: Thailand - Change in un-standardized weighted industry<br>and skill premium by sector: 1990-2004<br>0.15<br>0.1<br>0.05<br>0<br>1 2 3 4 5 6 7 8<br>-0.05 Change in Industry<br>Premium<br>-0.1<br>Change in Skill<br>-0.15<br>premium<br>-0.2<br>-0.25<br>Change<br><!-- End of picture text -->

**Industry**

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1. Agriculture 2. Mining 3. Food-Bev. Tobb.  4. Textile  5. Wood-Furniture 6. Paper  7. Chemicals 8. Non-metal mining products 9. Metal 10. Other manuf, 11. Utilities 12. Construction 13. Trade 14. Transport-Commun.15. Finance-Business 16. Other services.

<!-- Start of picture text --> Figure 18: Vietnam - Change in un-standardized weighted<br>industry and skill premium by sector: 1992-2006<br>0.1<br>0.08<br>0.06<br>0.04 Change in Industry<br>premium<br>0.02 Change in Skill<br>premium<br>0<br>1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16<br>-0.02<br>Industry<br>Change<br><!-- End of picture text --> 64
1. Agriculture-Mining 2. Manufacturing 3. Utilities 4. Construction 5. Trade 6. TransportationCommunication 7. Finance Business 8. Public Admin. 9. Other Services.

<!-- Start of picture text --> Figure 19: Cambodia - Change in un-standardized weighted<br>industry and skill premium by sector: 1997-2007<br>0.15<br>0.1<br>0.05<br>Change in Industry<br>premium<br>0<br>Change in Skill<br>1 2 3 4 5 6 7 8 9<br>premium<br>-0.05<br>-0.1<br>Industry<br>Change<br><!-- End of picture text --> 65
1. Agriculture-Mining 2. Manufacturing 3. Utilities 4. Construction 5. TransportationCommunication. 6. Trade 7. Public Admin. 8. Other Services (including Finance and Business and others).

<!-- Start of picture text --> Figure 20: China - Change in un-standardized weighted industry<br>and skill premium by sector: 1999-2005<br>0.1<br>0.05<br>0<br>C<br>h 1 2 3 4 5 6 7 8<br>-0.05 Change in Industry<br>a<br>premium<br>n<br>-0.1 Change in Skill<br>g<br>premium<br>e<br>-0.15<br>-0.2<br>Industry<br><!-- End of picture text --> 66
1. Agriculture-Mining 2. Manufacturing 3. Utilities 4. Construction 5. TransportationCommunication. 6. Trade 7. Public Admin. 8. Other Services (including Finance and Business and others).

<!-- Start of picture text --> Figure 21: Mongolia - Change in un-standardized weighted<br>industry and skill premium by sector, 1998-2007<br>0.15<br>0.1<br>0.05 Change in Ind<br>Premium<br>0 Change in Skill<br>Premium<br>1 2 3 4 5 6 7 8<br>-0.05<br>-0.1<br>Industry<br>Change<br><!-- End of picture text --> 67
# **5. Conclusion**

This paper has reviewed levels and trends in education and skill premiums, and skilled labor force, across eight East Asian countries, and over time, sector and sub-sector, representing the most comprehensive comparative exercise so far on this topic. Several main trends have emerged. Main trends include:

-there is evidence of increasing proportions of skilled/educated workers over the long run across the region

-this evidence combined with stable or increasing education/skill wage premiums (in regressions with only basic controls) indicates generally increasing demand for skills in the region (and that education is also leading to increasing inequalities in several countries)

-sector and sub-sector analysis of skill wage premiums and proportion of skilled labor, combined with changes in labor force composition in favor of the service sector, confirm that the service sector has become the most important driver of demand for skills for all countries (except Thailand)

-beyond these general trends, there is evidence that countries can be broadly categorized into three groups in relation to trends and patterns of demand for skills:

-Indonesia, Philippines and Thailand – where demand for skills is on the rise but only moderately so; and increasingly industry-specific (in particular for the Philippines and Thailand)

-Vietnam and China – where demand for skills is sharply on the rise and involving most sectors/sub-sectors

-Cambodia and Mongolia – where skill premiums are sharply on the rise across most sectors/sub-sectors, but accompanied with slow increases or even some declines in the proportion of skilled labor which point to less clear cut trends in demand and the importance of shortage of skills

-there is also evidence of rising industry premiums – and related possible labor market segmentation – in three countries of the region (Philippines, Thailand and Cambodia).

These results point to several **policy implications** . The main ones are: 68
-Governments should focus on policies promoting access to education (formal education but also skill development opportunities for the unskilled) to address the increasing demand for skills and/or the persistent skill shortages.

-The ground is generally stronger for supporting general rather than specific curricula given broad-based increases in skill premiums, but countries such as the Philippines and Thailand also require particular attention to specific curricula because of their more differentiated skill premiums (in favor of services in the Philippines and manufacturing in Thailand).

-Overall, across practically all countries, there is strong ground for better tailoring curriculum design and content and pedagogical approaches to the needs of the service sector given its role in driving the demand for skills.

-At the same time, while these measures take their time to act, governments could also target some of their social protection programs to unskilled workers to protect them from the “un-equalizing” impact of education.

-Finally, in the Philippines, Thailand and Cambodia, education and social protection policies should also be accompanied by policies that make labor markets less segmented

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