The Social Rate of Return to Investment in Education of the Employee in Taiwan - 政大學術集成


(1)a.~.~alaw~~. 1992-+ 11 fl. •• ~.~~#. ~~~**ft.&.~~~.~.~~~ The Social Rate of Return to Investment in Education of the Employee in Taiwan 51t~15. Chun-Chig Chang. #j. -t­. *X~~~.~.~~~~~~MA~~_Z~~~~ll~" llIM$o. ~lJtjU.~I!'~.liJ{. fA '. ..•. 1Jt_~~. George Psacharopoulos ~lM~ • P.J.&fi'iSclri'd:.ltt. *'l- • fi!i.l±lIJt'fil~ll~jffiUllll$ • tE 1976 £fft.~. 1987 ~ , 1t.>¥j:~~II¥Jll*~• •IlIM$1!lr"F : .IJ'.~ll"~• •IlIM$lii 38.08 % ; 1i!iIa;tj:t¥lii 18.96 % ; Jfitj:tlii 12.65 % ; .~.~lii 16.78 % ; :*:.lii. 13.28 % ; iIf~mlii 9.39 %. 0. JltlJtfi!i.:a~liitT.I~~lil. ' tj:t~ftliJ ' Jfi~. ft1f • m±~• •IlIM$~lii 38.08 %; 18.96 %& 13.03 % ' ~-IiM &tj:t.liJ{~tTJt&ftlillii. 27 % ; tj:t~It.lii 16 % ; Jfi~ftlillii 13 %~*f*. ~·~~~li!iIft.~~~• • t~ll"~A~~o. ~Jlt. •. st.~1I>1<.~stmm!JI&lIqft_~f... •. ~~stIEmftlil~±"~. ~~~~~• •IlIM$,~• •~.~~.~.~ft.~lii.~~Z~. atIiJdft. 0. I ' Introduction This paper will estimate the social rate of return to education of the em­ ployee in Taiwan. The impact of education includes the social rate of return to education and the private rate of return to education. For the reason that the. *~*&A~~£I*.a.# ~a~o. ". •••• ±'~~a~*.*~fi~M. -151­.

(2) -,. .:&~. ··::C~. -. 1} th &': tit. ~. ftfJ. personal income data are very difficult to collect, so this paper basically focusing on the social rate of return to education. From this research we can know that if the employee gained more education in different education level then how much the society will benefit.. n". Social Rates of Return to Education: Research Question As we already know, the Nine Year Compulsory Education Policy (NYCEP). can be seen as an investment. It is an investment by the government to increase the wealth of the collective body. Just like a commercial organization deciding whether or not to continue its investment on certain items so that the organization's resources can be most efficiently used, the government should calcu­ late the social rate of return of its policy investment so that the government's budget can be used best. If the social rate of return to the policy is high enough, then it is reasonable for the government to continue the investment. If the social rate of return is low, then the government should either try to improve the im­ plementation of the policy, or consider investing the resources in other, higher re­ turn policies.. m" Social Rate. of Return: Methodology and Data. 1. Conceptual framework According to investment theory, the rate of return on a project is a summary statistic describing the relationship between the costs and benefits associated with the project. It is defined as the rate of interest which causes the sum of the dis­ counted net benefits to equal zero. Thus, if the project's expected net benefits are. 13 t. per year, extending over a period of n years, the internal rate of return (r) of. this proj"ect is defined by solving equation (i) for r.. n Equ.(i). E. t= 1. 13 t (1 + r )t. =0. By analogy, the rate of return to a given educational level can be defined by comparing the level of education to the next lower one. For example, an invest­ ment project called "higher education (h)" can be evaluated relative to the alterna­. -152­. '""".'-~.

(3) r {.,. a~. 1992.f 11 f]. .*ftt~. ~~. •• ~. ~~#. tive project "senior high school education (s)." The costs during, say, four years' study consist of direct outlays (Ch) and foregone earnings (Ws) while the benefits renect the differential between wages earned by a higher education graduate (Wh) and those earned by a secondary school graduate (Ws) in the years following completion of higher education. On the assumption that the length of study will be four years and that the higher education graduate will have a working life of 43 years, the rate of return to investment in higher education can be found by solving equation (ii) for r.. o. 43. t=-3. t=1. E (Ch+Ws) t (1+ r )-t = E (Wh-Ws) t {1+ r )-t. Equ. (ii). Equation (ii) is merely the application of the most general statement of rate of return calculations (equation (i» to more specific assumptions. Rates of return may be either "private" or "social." Private rates of return in­ clude only the benefits received directly by the worker and only the direct and opportunity costs borne personally by him/her. The social rate of return includes not only private costs and benefits, but also all income earned but not received by the worker, as well as all costs of education that are subsidized. If wages equal the marginal product of each type of labor and if the benefits and costs streams in equations (i) and (ii) are thought of as private ones, we can calculate the social rate of return to higher education by adding taxes to the net earnings stream and subsidies to the cost stream (Psacharopoulos, 1980). Thus, we now define Equ. (iii) W's =Ws + Ts and W'h=Wh + Th where Tsand Th are the income tax paid by the two kinds of graduates, and C'h = Ch + Sh, where Sh is the subsidy society provides to higher education per stu­ dent, over and above the part borne by the student himself. Substituting the val­ ues of W'h' W's and C'h in equation (ii), we have. o. Equ. (iv). E (C'h+W's)t (l+r')-t t= -3. 43. =E. (W'h-W's) t (l+r'tt t= 1. r' is the social rate of return to higher education. 1. -153­.

(4) *~~tll. 1f.;. $Jl. 2. Social costs of different educational levels Social costs measure the total resources of education which include (1) direct costs - the rental value of building and equipment, salaries for teachers and staff, etc., and (2) indirect costs, such as earnings foregone by students. The direct costs can be computed simply by dividing the total expenditures of the different educa­ tional levels by their respective total number of students. For indirect costs, we will take the foregone earnings of students from junior high schools and above in­ to account; students below this level have not reached the legal working age of 15. We will use the same method to calculate social rates of return to different educational levels, s.pecifically, elementary school, junior high school, senior high school, junior college, university and senior colleges, and graduate school. That is, the rate of return to elementary school relative to no education, junior high school relative to elementary schooL senior high school relative to junior high school, etc., will be calculated. Since there are no data on actual expenditures borne out of pocket by students and their parents, the private rate of return cannot be comput­ ed.2 Data. The data to perform the rate of return calculations come from several sources. The data on earnings by level of education come from DGBAS reports . for 1989. This data source, which also uses labor force survey data, 3provides av­ erage earnings by level of education for each year between 1976 and 1988. Cost data by level of education come from The Educational Statistics of the Republic of China, published by the Ministry of Education 1989. Direct cost data is provided in Appendix Table A. The Ministry of Educa­ tion provides summaries of total public expenditures per year for each level of education for public and private education together in Taiwan. The educational system of Taiwan is predominantly public in the lower levels, but substantially pri­ vate at higher levels. For example, in 1988-89, one percent of elementary educa­ tion, 4.6% of junior high school, 25% of senior high school, 81.7% of junior col­ lege, 60.4% of university students, and 23.1% of graduate students attended pri­ vate institutions. These percentages are somewhat higher than for earlier years. On the other hand, private schools and universities in Taiwan receive very large subsidies from the central government. The subsidized portions of private educa­. -154­.

(5) 1992.fll~. ~~~.*a.~w~~. ••. ~.~~~. tion are included in the cost estimates, but no data exists from which it would be possible to estimate the unsubsidized portion of educational costs of running pri­ vate schools. The result is that the cost estimates that are available (and are summarized in Appendix Table A) may underestimate the true costs of providing junior college and university education in Taiwan. Data on average earnings by year for persons of different educational at­ tainments is provided in Appendix Table B. These data are used both to estimate the opportunity cost of attending a level of education, as well as to approximate the net benefit from attending that level of education. Appendix Table C summa­ rizes the total measurable social costs of education, which are equal to the direct cost plus the opportunity cost of schooling. For example, the total cost of attend­ ing one year of senior high school in 1976 is the direct cost to Taiwan of providing a year of schooling (NT$ 7535, Table A) plus the foregone earnings of a junior high school graduate in 1976 (NT$ 60109, Table B), for a total social cost of NT$ 67644. The net benefit to a high school graduate of 1976 is estimated in this dis­ sertation as the difference in incomes over his work life of high school graduation compared with junior high school graduation. In this dissertation this difference is computed as the year of graduation income of senior high school graduates less the income of junior high school graduates. For 1976 graduates of senior high school, this is NT$ 77318 - NT$ 60109, or NT$ 17209. This net income is pre­ suined to not change through retirement at age 65. In other words, the rate of re­ turn to, for example, senior high school education involves three years of net costs while the student is in high school, followed by n years of net benefits, where the benefits period extends from the customary age of graduation from this level until 65.4 The calculations compare junior high school graduation with respect to ele­ mentary education, senior high school education with respect to junior high school, junior college education with respect to senior high shcool, senior college and uni­ versity education with respect to senior high school, and graduate school with re­ spect to university and senior college education. This method for estimating the net benefit to education suffers from several weaknesses. Since salaries rise with experience, real economic growth, and infla­ tion, the differentials computed in our cross-sectional methodology are likely to understate the actual change in net earnings over time, and therefore understate. -155­. ".

(6) .f~*~lt. ~. jtJ]. the true rate of return to education. Whether the estimates of the true rate of re­ turn are underestimated or overestimated depends in part on the age distribution of the workers in the samples used to calculate average wages. For example, if young workers are overrepresented in the sample, then the actual average earnings for a given education level will be underestimated. On the other hand, if older workers are overrepresented, the average earnings may be overestimated. We ex­ pect that the impact of NYCEP would be to increase the number of young work­ ers with higher levels of education, and decrease the number of younger workers with less education. This would cause our estimates of the rate of return to edu­ cation to be biassed downward. This measurement problem of potentially underestimated rates of return clouds the comparison of rates of return to education with interest rates in the rest of the economy, which also include a premium for anticipated inflation. Also, part of the return to education may be a return to ability differences, so that the rate of returns we can estimate consist partly of a return to being more able, and therefore able to get higher education, particularly in the pre-NYCEP years, and partly to a pure return to education. Another difficulty is that the results are more reliable for men than for wom­ en, since women may spend many years outside the labor force, therefore not re­ ceiving net benefits. those years.. To summarize, the rate of returns that can be calculated are subject to vari­ ous biasses. The lack of private spending on private education in Taiwan tends to underestimate costs, therefore overestimate the rate of return to education. The lack of data on ability of workers and on number of years out of the labor force for women also overestimates the rate of return to education. The use of cross sectional earnings data by educational level tends to underestimate the rate of re­ turn to education. It is not possible to guage which set of biasses predominate. However, while the procedured employed here may be flawed, they are exactly the same flawed procedures that other economists have used to analyze rates of re­ turn in other developing countries.S. N' Social Rate of Return to Education: Results The results of the rate of return calculations are summarized in Table 1.6. -156­.

(7) ~~~.*k.~W~~. 1992-+ 11 fl. •••• ~*~. Table 1: Estimates of the Social Rate of Return to Different Educational Levels in Taiwan for Graduates of Different Years(%). PRMRY JR-HGH SR-HGH JR-CLG. SR-CLG UNV. GRAD. 1976 1977. 1978. 1979. 1980. 1981. 1982. 1983. 1984. 1985. 1986. 1987. 36.50 38.74 40.63 39.31 39.41 37.94 34.93 34.43 45.03 36.15 39.22 34.72. 19.15 20.76 20.44 19.91 19.10 18.43 17.92 17.79 18.14 17.91 19.47 18.45. 13.84 13.58 13.57 13.14 13.09 12.65 11.86 12.06 12.45 11.90 11.88 11.81. 17.27 17.40 17.35 17.22 17.27 17.39 16.49 16.49 16.51 16.30 15.97 15.70. 11.87 15.11 13.85 13.99 15.14 13.90 12.34 12.22 12.47 12.85 13.02 12.63. 8.74. 9.68. 9.36. 10.48. 11.31. 11.08. 8.73. 8.72. 8.66. 8.16. 9.37. 8.61. AVRG. 38.08. 18.96. 12.65. 16.78. 13.28. 9.39. Another classification reviewed by Todaro, that of the Organization for Eu­ ropean Cooperation and Development (OECD), classifies Taiwan as an upper­ income, Newly Industrializing Country (NIe). Other NICs include the Republic of Korea, Mexico, Brazil, Portugal, Argentina, and Greece. The social rate of return estimated for 1987 graduates of primary school is 34. 72 percent; 18.45 percent for junior high school; 11.81 percent for senior high school; 15.70 percent for junior college; 12.63 percent for university and senior col­ lege; and 8.61 percent for graduate school. Averaging the results over the 12 year period 1976-1987, the results are slightly higher than for 1987. Taiwan's social rate of return to differences in edu­. -157­. I. I.

(8) .'. ~H~.:'; ~+!'. ''i~'' ". ',,0,:. ...... ,.•.. ~. *~~~Il. 'Jl. cational levels averges 38.08 percent for primary school; 18.96 percent for junior high school; 12.65 percent for senior high school; 16.78 percent for junior college; 13.28 percent for university and senior college; and 9.39 percent for graduate school. This very slight downward trend in the calculated rates of return suggests the possibility that the marginal rate of return to education may be falling in Tai­ wan. Psacharopoulos' summaries of rates of return to levels of education in devel­ oping countries (see table 2). Table 2 summarizes and compares the results for Taiwan with the results for the average of developing, intermediate, and advanced countries. Taiwan's social rate of return to primary education is 38.08 percent, which is 11.08% higher than Psacharopoulos' average for developing countries and more than double the rate of return in intermediate countries. For secondary ed­ ucation the Taiwan average is 18.96 percent, which is nearly three percentage points higher than the developing economies' average, five percentage points high­ er than the intermediate countries' average, and nearly double the advanced coun­ tries' average. In higher education the Taiwan average is 13.03 percent, which is identical to the developing economy average, but is three percentage points higher than the intermediate average and four points higher than the advanced countries average. From Tables 1 and 2, we can find some rate of return patterns. (1) The re­ turns to primary education are the highest among all educational levels; this is consistent with worldwide patterns. (2) All the rate of return to investment in ed­ ucation estimates are well above the ten percent common yardstick of the oppor­ tunity cost of capital, except for graduate school. Since the methodology did not permit the earnings differences to rise with inflation or experience, while inflation premiums are normally included in the opportunity cost of capital, this strengthens the argument that education is indeed a valuable investment for Taiwanese society. (3) There are diminishing marginal returns to investment in education. With the slight exception of junior college, the estimated social rates of return decline rapidly after primary school. There are several policy implication in the data: (1) Since primary education is already compulsory, the high measured rate of return raises the question of. -158­ \. '~ "", .,.

(9) 19924'- 1111. ~~~.~a.«w~a~.~.~~*. Table 2: Social Rate of Return to Investment in Education (percent). Primary Education. Secondary Education. 38.08. 18.96. 13.03. Other Developing Countries. 27. 16. 13. Intermediate Countries. 16. 14. 10. not applicable. 10. 9. Country. Taiwan R.O.C.. Advanced Countries. Higher Education. whether the return to improving the quality of primary education would also be high. Perhaps a priority of the ROC government should be to evaluate the costs and benefits of improvements. (2) Secondary and higher education are socially profitable and should be pursued and expanded. (3) Even though the social rate of return declines with higher levels of education, the returns stay sufficiently high that there is no obvious argument for cutting the extent of investment in educa­ tion. (4) The social rates of return to education in Taiwan are at least as high as the average for other developing countries, and are also higher than for the in­ termediate and advanced contries. (5) The labor policy should encourage the em­ ployee to gain more education in different education level during their career de­ velopment process. On the job training can be implemented not only on the short term or technical classes but also the long term and formal education in different education level.. -159­. \..

(10) *fh~*1l Appendix Table A:. ~. .»J. Direct Public Expenditures on Education Per Student. Year. < PRMRY. PRMRY. JR· HGH. SR·HGH. JR ·CLG. SR ·CLG UNV. GRAD. 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987. 3056.86 3695.15 4428.18 5652.90 7236.87 8584.56 10014.20 12125.85 11881.30 12197.76 13112.96 13557.89. 4707.68 5432.32 5808.69 7713.46 9463.08 12417.15 14828.40 16724.89 17901.61 19379.23 20603.67 21341.32. 12987.89 14324.22 17041.01 21191.95 27192.62 33320.55 40578.23 39764.02 39400.08 44231.14 47202.28 49931.88. 7535.513 8149.941 9683.67 12169.85 14694.12 17509.35 21921.90 22605.85 23976.70 25733.47 27569.53 31422.47. 17585.36 11110.76 16139.14 18507.42 19584.50 31870.33 38838.40 43351.09 42529.99 43992.88 44715.77 50342.69. 17584.36 30359.54 30812.18 32838.15 47371.48 58918.60 76949.51 94427.74 80598.46 97990.80 92208.57 113615.40. 17584.36 30359.54 30812.18 32838.15 47371.48 58918.60 76949.51 94427.74 80598.46 97990.80 92208.57 113615.40. Appendix Table B:. Average Earnings by Educational Level and Year. Year. < PRMRY. PRMRY. JR· HGH. SR·HGH. JR CLG. 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987. 44059 44718 50405 60735 70862 81970 85745 85758 70538 94798 98788 113687. 60776 67374 80223 96398 116747 132523 136183 145180 155759 160303 164734 181170. 60109 75538 85099 101664 116644 132155 137676 148451 163463 168510 172616 196565. 77318 87079 101179 117960 144256 163103 171121 177401 191411 194844 204392 220017. 89816 101920 119544 144613 176284 209638 225249 232397 248337 256338 262709 285413. Appendix Table C:. SR ·CLG GRAD 111785 127940 148388 175839 225098 259870 271830 293326 303847 332324 346620 366313. 112905 159340 156611 206763 336415 397521 330642 397004 414579 375667 449804 470726. Direct Costs Plus Foregone Earnings. Year. PRMRY. JR·HGH. SR·HGH. JR ·CLG. SR -CLG UNV. GRAD. 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987. 4707.68 5432.32 5808.69 7713.46 9463.08 12417.15 14828.4 16724.89 17901.61 19379.23 20603.67 21341.32. 73763.89 81698.22 97264.01 117589.95 143939.62 165843.55 176761.23 184944.02 195159.08 204534.14 211936.28 231101.88. 67644.513 83687.941 94782.67 113833.85 131338.12 149664.35 159597.90 171056.85 187439.70 194243.47 200185.53 227987.47. 94902.36 98189.76 . 117318.14 136467.42 163840.50 194973.33 209959.40 220752.09 233940.99 238836.88 249107.77 270359.69. 107400.36 132279.54 150356.18 177451.15 223555.48 268556.48 302198.51 326824.74 328935.46 354328.80 354917.57 399028.40. 129369.36 158299.54 179200.18 208677.15 272469.48 318788.60 348779.51 387753.74 384445.46 430314.80 438828.57 479928.40. ,. -160­.

(11) 1992lf- 1111. ~~~.*ft.~W~~. ••. ~.~~#. Foot Note U:.- : Psacharopoulos, George. Returns to Education: An International Compar­ ison (New York: Elsevier Scientific Publishing Company 1973). tt= : In principle, one might survey a sample of Taiwan schools and colleges, particularly in the private sector, to find out what tuition costs would have been in various years. But estimating the total out-of -pocket costs to par­ ents, particularly for private education, is complicated by the fact that pri­ vate schools add many additional fees onto the basic tuition fee, these fees vary greatly from school to school, and it would be difficult if not impossi­ ble to get time series data on all out-of-pocket costs incurred by the par­. tt.:=.. ents. : The micro-data used for the earnings functions is a subset of the labor force survey data collected by DGBAS.. ttlIB : The period of net costs is six years for primary school, three years each for junior high school, senior high school, and junior college, and four years for senior college and university. Since most graduate education is at the masters' level, I assumed that the period of net costs for graduate school was two years. Students are predicted to graduate at 12 years of age for elementary school, 15 for junior high school, 18 for senior high school, 21 for junior college, 22 for senior college and university, and 24 for graduate school. While a small percentage of males volunteer for the military, and are paid competitive market salaries, most males have to undergo two years of compulsory military service at low wages. However, these two years out of the labor market for males was ignored in the computations. : According to a standard textbook in development economics, Taiwan was classified in the 1985 World Bank categorization as an upper-middle in­ come country. GNP per capita in upper-middle income countries falls in the range of U.S. $ 1,190 to U.S.$ 4,129 (in 1985 U.S. dollars). Taiwan's per capita income in 1985 was U.S.$ 3,250, which is similar to that of Iran ($3,690), Macao ($3,450), Venezuela ($3,080), Greece ($3,550), and Malta ($3,310). Taiwan's per capita income is far below that of Hong Kong ($6,230), Japan ($11,300), Singapore ($7,420), and virtually every country in Europe, including the East Bloc countries. Todaro considers upper-middle. -161­ \..

(12) 1}th*tt. ¥. j!fJ. income countries to be "developing countries" (Todaro, 1989, pI6-17). tt~. :I. am grateful to my friend Don-sing Hwong of the Academica Sinica for. help in programming the solutions to the discounting equations for each of the schooling levels for each year.. Reference Blaug, Mark. 1972. "The Correlation Between Education and Earning: What does it signify? "Higher Education. 1(1):53-76. Blaug, Mark. 1970. An Introduction to the Economics of Education. London: Allen Lane. The Penguin Press. Mincer, Jacob. 1974. Schooling Experience and Earnings, New York: Columbia University Press for National Bureau of Economic Research. p88. Psacharopoulos, George. 1970.. "Estimating Shadow Rates of Return to Invest­. ment in Education," Journal of Human Resources. Volume 5 No.1 pp. 34­ 50. Psacharopoulos, George. 1980. "Returns to Education: An Updated International Comparison" in Timothy King ed. Education and Income: A Background Study for the World Development Report 1980. World Bank Staff Working Paper No. 402 July pp.95-96. Psacharopoulos, George. 1981. "Returns to Education: An Updated International Comparison:' Comparative Education, Volume 17 No. 3 pp. 321-41. Psacharopoulos, George & Maureen Woodhall. 1985. Education for Development: An Analysis of Investment Choices. New York: Oxford University Press for the World Bank. Psacharopoulos, George. 1988a. Economics of Education: Research and Studies. Elmsford, New York: Pergamon Press. Psacharopoulos, George. 1988c. "Shadow Wages and Rates of Return:' in George Psacharopoulos ed. Economics of Education: Research and Studies, pp. 347­ 48. Elmsford, New York: Pergamon Press.. -162­.