Microeconomic analysis of private returns to education in Egypt: an instrumental variable quantile regression approach

ABSTRACT

This study provides updated estimates for the rate of return to an additional year of schooling in Egypt. Additionally, it addresses the major issues of heterogeneous returns and endogeneity of educational attainment. Instrumental variable quantile regression along with other models is employed for that objective. The paper uses the most recent issues of the Harmonized Labor Force Survey and Egypt Labor Market Panel Survey from 2008 to 2018. The findings can be summarized as follows: the returns increase over time up to 2015 then decreases to reach 5.67% in 2018, a number that falls below the global average. Moreover, females’ returns to education are higher than males; the returns are also higher in urban areas compared to rural ones providing an evidence that there exists developmental bias towards urban regions in Egypt. In line with preceding studies, the instrumental variable two-stage least squares estimates are higher than the ordinary least squares’ estimates. Additionally, a confirmation of heterogeneous returns across the wage distribution is presented. The instrumental variable quantile regression estimates exhibit an increasing pattern across the levels of wages. Thus, the less able individuals gain lower marginal profits of education than do the more gifted employees. Indicating complementarity between education and unobservable characteristics and that education may aggravate wage inequality in Egypt. Furthermore, it confirms the presence of the over-education crisis. Moreover, the region-based results in terms of the ability explanation provide that education complements low ability in rural areas while it compensates it in urban ones.

KEYWORDS:

• Returns to education
• endogeneity
• heterogeneous returns
• instrumental variable quantile regression
• wage distribution
• Egypt

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 The real wage is calculated using 2010 consumer price index as base year.

2 The first survey conducted after the 2011 revolution.

3 Taking the first derivative of lnW relative to experience and equalizing the results by zero, the optimal years of experience are 45 years, after that the effect of experience on wage turns negative.