This thesis applies traditional and innovative models of education economics to new data from regional Cambodia to calculate the education premium, rate of return on education, and the impact on personal equity for an average graduate.
Building on the traditional Mincer model, where log wages are a function of education, experience, and experience squared, the thesis addresses nine issues that complicate the field of education economics, and briefly reviews the evidence from around the world and specifically for Cambodia. The most comprehensive work done on Cambodian education was found to have included an error of interpretation, which caused a substantial underestimation of the annualised university premium. Until now the best available estimate for the annualized university premium in Cambodia was 11-12% but the correct interpretation of the results shows that the annualised premium is actually 27-29%.
A survey was conducted in regional Cambodia in 2012, collecting primary data from 530 respondents. This data was used in a series of models, starting with the basic Mincer model and expanding to include non-linear education premiums, and for the first time including control variables for ability and socio-economic status. A series of non-standard education models were also used, using different functional forms and statistical techniques. One of those models included heterogeneous experience premiums, and the analysis of that model led to two conclusions: (i) the standard Mincer assumption of independent education and experience premiums is false; and (ii) the omission of heterogeneous experience premiums causes university premiums to be exaggerated; and also a speculation that (iii) the omission of heterogeneous experience premiums explains the apparent convexity of the education premium.
Some of the key results of the preferred model include an average education premium of 6.6% and an annualised university premium of 20.6%, though the conventional reporting framework for annualised university premiums is challenged and a more accurate estimate of 15.9% is presented.
The education premium is not the same thing as the education rate of return, and the above premiums are used to calculate (for the first time) the rate of return on education in Cambodia. The rate of return on an average year of education with base case assumptions is 10.3% for men and 9.9% for women, and for university education is 14.1% for men and 13.5% for women. A comprehensive range of sensitivity analysis shows that these estimates are robust in most instances, though the results depend crucially on assumptions about when people enter the workforce.
The above information is used to calculate the personal equity (present value of future income) of Cambodians, and the marginal impact of education on personal equity. The use of personal equity finance is explored as a way to fund education. Using contract parameters similar to the Human Capital Project, investing in personal equity in Cambodia has a 9.8% rate of return for the investor, and a net benefit of around $11,000 (men) or $8000 (women) for the student.
Finally, building on the idea of personal equity as a financial asset, the idea of a personal equity market is explored, and a proposal made for how such a market could be created by the Australian government without impacting on education policy or the government’s financial risk profile.