Returns to schooling, ability and cognitive skills in Pakistan

Abstract

This study investigates the economic outcomes of education for wage earners in Pakistan. 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 Pakistan, 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 a unique purpose-designed survey of more than 1000 households in Pakistan, collected in 2007. The paper also examines the shape of the education-earnings relationship in Pakistan as a way of testing the poverty reducing potential of education in Pakistan.