This paper investigates the economic outcomes of education for wage earners in Pakistan and India. This is done by analysing the relationship between schooling, cognitive skills and ability on the one hand, and economic activity, occupation, sectoral choice and earnings, on the other. In the economics of education literature for South Asia, an important question remains largely unaddressed: what does the coefficient on ‘schooling’ in conventional earnings function estimates measure? While human capital theory holds that the economic return to an extra year of schooling measures productivity gains acquired through additional schooling, the credentialist view argues that it represents a return to acquired qualifications and credentials while a third, the signalling hypothesis, suggests that is captures a return to native ability. This paper seeks to adjudicate between these theories using data from unique and comparable surveys of more than 1000 households each in Pakistan and India, collected in 2007-08. The paper also examines the shape of the education-earnings relationship as a way of testing the poverty reducing potential of education in South Asia.

1. Education, Skills and Earnings Evidence from India and Pakistan Monazza Aslam Anuradha De Geeta Kingdon Rajeev Kumar

6. Table1: Distribution of the Labour Force in India & Pakistan, by gender (aged 15-60)

8. RECOUP Pakistan : Summary statistics by occupation All Out of Labour Force Unempl oyed Unpaid Family Labour Agri. Self employed Self employed Wage employed Annual Earnings (Mean) 61,835 - - - 53,575 63,875 62,356 Annual Earnings (Median) 48,000 - - - 42,000 48,000 52,000 Log Earnings (Mean) 10.7 - - - 10.4 10.6 10.8 Years of education 4.8 3.4 5.6 3.6 4.9 6.0 6.8 Observations 3960 1564 314 430 206 480 966 Earnings Observations 1530 0 0 0 170 458 902 Assigning unpaid workers to their respective occupation Annual Earnings (Mean) 43880 - - - 23,324 38,808 62,356 Annual Earnings (Median) 36000 - - - 0 18,000 52,000 Log Earnings (Mean) 10.7 - - - 10.3 10.6 10.8 Years of education 4.8 3.4 5.6 - 3.9 5.7 6.8 Observations 3827 1564 314 - 375 608 966 Earnings Observations 2018 0 0 0 375 608 902

9. RECOUP India : Summary statistics by occupation All Out of Labour Force Unemployed Unpaid Family Labour Agri. Self employed Self employed Wage employed Annual Earnings (Mean) 36,675 -- -- -- 40,792 58,413 29,092 Annual Earnings (Median) 21,600 -- -- -- 21,696 36,000 18,000 Log Earnings (Mean) 9.99 -- -- -- 10.03 10.56 9.81 Years of education 5.6 6.6 8.1 4.0 4.5 8.1 5.7 Age 31.9 28.2 23.7 31 42.7 36.6 31.6 Proportion men 53.3 25.5 55.2 32.6 88 84.5 74.4 Proportion urban population 31.5 55.1 59.7 10.5 1.2 57.0 30.7 SMaths 2.8 3.1 3.7 2.2 2.7 3.8 2.7 Sliteracy 2.3 2.8 3.4 1.7 2.2 3.3 2.1 English 4.6 6.2 7.7 2.9 2.9 7.8 4.3 Observations 3438 848 67 886 325 291 1021 Earnings Observations 1571 0 0 0 324 277 970

11. OLS Earnings equations, by gender PAKISTAN INDIA Agriculture Self Employed Wage Worker Agriculture Self Employed Wage Worker Male Education 0.016 0.015 -0.017 -0.022 0.040 0.109 0.080 0.043 0.044 0.070 (0.50) (0.44) (-0.69) (-0.98) (8.66)** (8.00)** (6.22)** (4.94)** (5.15)** (10.7)** LnCapital 0.127 0.172 - 0.077 0.020 (4.04)** (3.73)** (7.16)** (2.32)** # N 168 162 356 355 768 285 285 235 235 723 Female Education 0.104 0.074 0.091 0.114 0.088 0.019 0.016 0.087 (3.91)** (3.08)** (4.77)** (1.7)* (1.52) -0.57 -0.42 (6.37)** LnCapital 0.130 - -0.049 -0.019 (5.04)** (-1.03) (-0.38) # N 98 88 177 39 39 42 42 245 All Education 0.013 0.012 0.018 0.005 0.045 0.108 0.082 0.039 0.040 0.076 (0.39) (0.36) (0.86) (0.25) (9.21)** (7.97)** (6.44)** (4.45)** (4.58)** (12.78)** LnCapital 0.130 0.160 - 0.068 0.016 (4.16)** (4.82)** (6.33)** (1.80)* Male 1.495 0.978 1.205 0.453 0.605 0.350 0.310 1.498 1.486 0.695 (1.29) (1.22) (8.61)** (2.36)** (6.18)** (2.11)** (1.77)* (9.8)** (9.58)** (12.47)**

14. Estimated marginal return to schooling India Pakistan Agri Self Wage Agri self wage Male Primary 10.0*** -- 7.5*** 10.1* -- 2.9** Lower Secondary 8.1*** 3.4** 7.9** -- -- 3.0*** Higher Secondary 19.6*** 3.4** -- -- -- 13.0*** Tertiary 0.0 8.9*** 23.2*** 33.3*** -- 3.8***

16. Figure 1 – Education and Earnings among Wage employed in Pakistan

17. Earnings equations, with cognitive skills PAKISTAN INDIA Agriculture Self Wage Agriculture Self Wage Male Smaths 0.081 0.034 0.033 -0.011 0.070 0.020 (0.68) (0.63) (1.38) (-0.20) (1.14) (0.77) Sliteracy 0.023 -0.012 0.060 0.165 0.029 0.119 (0.32) (-0.34) (3.81)** (3.57)** (0.61) (5.36)** English -0.000 0.002 0.017 0.059 0.021 0.040 (-0.00) 0.15 (4.90)** (4.99)** (3.15)** (7.73)** # N 157 157 335 335 515 514 262 262 201 201 493 493 Female Smaths 0.056 -0.002 0.171 0.240 0.065 (0.34) (-0.01) (1.06) (1.45) (1.77)* Sliteracy 0.197 0.226 0.039 -0.149 0.094 (2.44)** (2.82)** (0.29) (-1.46) (2.16)** English 0.067 0.047 --- 0.014 0.060 (2.73)** (2.77)** (0.69) (4.90)** # N 96 96 114 114 38 38 39 39 231 231

22. Extra table : Earnings equations with education level, and the RORE (Pakistan) Earnings equations Marginal return to education Agri Self Wage Agri self wage 1. Male OLS OLS OLS Primary 0.505 -0.043 0.146 10.1* -- 2.9** (1.68)* (-0.32) (2.14)** Lower Secondary 0.058 -0.034 0.297 -- -- 3.0*** (0.18) (-0.21) (5.44)*** Higher Secondary 0.261 0.229 0.556 -- -- 13.0*** (0.70) (0.88) (6.78)*** Tertiary 1.261 -0.828 0.671 33.3*** -- 3.8*** (3.18)*** (-0.79) (7.16)*** # Individuals 168 356 768 2. Female Primary 0.388 0.534 -- -- -- (1.54) (1.07) Lower Secondary 0.862 0.836 -- 9.5** 6.0*** (2.51)** (3.16)*** Higher Secondary 0.336 1.018 -- -- 9.1*** (0.54) (3.16)*** Tertiary 1.763 1.340 -- 18.0*** 10.7*** (2.88)*** (4.32)*** # Individuals 98 117