In Georgia Education Matters (But Probably Won’t Make You Rich)

The ISET Economist, a blog about economics in Georgia and the South Caucasus by the International School of Economics at TSU (ISET)

By Davit Keshelava

It is widely recognized that education is the key to the future. In general, educated people have higher earnings and lower unemployment rates, and highly-educated countries grow faster and innovate more than the other countries. Therefore, in the recent economic literature, education is considered as a good investment. The cost of education is the value of time (opportunity cost) and money (tuition fee and other fees) people spend to acquire a secondary school certificate, professional education certificate or university diploma. While the benefit of gaining an education is premium in earnings for graduates (there are also other benefits like better working conditions, recognition and achievement at work), empirical literature suggests that there are two channels from which education affects earnings. First, it improves workers’ skills that, in turn, raises productivity of labor and lead to higher wages. Second, higher education provides the credentials that signals to employers that the candidate has the appropriate skills for a certain job.

The human capital approach is based on the idea that individuals have to compare these costs and benefits and decide at which degree to stop. If the benefits are not large enough to compensate the costs, the individual might think that it is not worthwhile to gain an additional degree. Therefore, while we consider the decision of ordinary people about how much to invest in education, it is important to determine what the earning premium is of an additional degree.  But the world is not that simple and there are plenty of other socioeconomic factors that play an important role in the decision to continue studying or dropping out (Lemieux, 2001). This blog-article will try to measure the effect of education on earnings in Georgia by controlling the main socioeconomic factors that might have a significant influence on wage distribution. 

Georgia is a transition economy, with massive structural changes in the first decade of the transition process that significantly worsen the socioeconomic situation. Following wars, unsuccessful institutional reforms, hyperinflation, inefficient taxation system and permanent budget sequester, building a sound education system became a low priority for the Georgian governments. Therefore, before the Rose Revolution, there were three main problems in the education system: corruption, low access to education and low quality of education. Despite such a poor condition, there was high demand for higher education. After the revolution, the corruption and affordability problem was successfully solved, while the quality of education still remains one of the most challenging areas.

Much of the economic literature on the effect of education on earnings has been inspired by the seminal work of Mincer (1974) and Becker (1975) on human capital. Mincer (1975) captured the return to education by estimating simple OLS regression, where log earnings is considered a dependent variable that is explained by the number of years of education, potential experience and squired term of potential experience. This blog-article considers modification of the classic Mincer equation by controlling large numbers of socioeconomic factors that also contribute to people’s earnings. As a dependent variable, we used log of earnings, where earnings are defined as: wage of the hired worker based on the written or oral agreement, the income of the entrepreneurs working on their enterprises and farmers’ income, earnings of the people working without hiring in the non-agricultural sector (manufacturing, trade, transportation, construction, handcraft, repair or professional activity – a reporter, a medical diagnostics, treatment and consulting). Moreover, the main interests of this research are two dummy variables that represent professional education and higher education (other lower levels of education are considered as a base). We controlled experience of people by age, gender of the individuals, ethicality, and rural-urban distribution of people, marital status and sectors of employment. This simple OLS analysis is based on the yearly data of the Integrated Household Survey (IHS) from 2008 to 2014 provided by Geostat.

EDUCATION PREMIUM

Among all the people presented in the sample, 20% to 24% have some form of tertiary education, while the same number for employed who earn any income is much higher at 42%. In addition, the proportion of people with some type of professional education is 20% to 22% in the whole sample and around 25% among employed people. Georgia is distinguished by low levels of illiteracy, as only 0.5% to 1.15% do not know how to read and write. Corresponding statistics again indicate that gaining higher education is very popular among Georgians. However, the main question is how professional and higher education helps people to earn more. The main findings of the regression analysis are presented in Table 1 (some variables that were controlled are not presented on the table, to avoid overload).

  People with higher education earn 40% to 51% more compared to       those with a general education. However, earning premium fluctuates   over time and does not reveal a clear pattern of increase or decline.     While higher education is a big driver of earnings, professional         education is shown to contribute relatively little-  4% to 6% - and       again reveals no clear trend over time.

Despite tertiary education having a significant earnings premium, the rate of return on that additional year of schooling is still low compared to other countries (Jugheli, 2012). If we decompose earnings into four groups for different levels of education (0-150 GEL monthly low earnings, 150-435 GEL lower than medium earnings, 435-1000 higher than medium earning, and 1000 and above high earnings), we will discover that as education level increases, the people concentrated in the low earning groups shrink significantly, while high earning groups increase. This finding again supports the idea that education has an earnings premium. Yet, the share of individuals with comparatively high earnings is higher in the Bachelor’s or Master’s degree group, though the indicator itself is low even for these groups, showing that only 5% and 10% of individuals who have a Bachelor’s and/or Master’s degree respectively, earn above 1000 GEL monthly. Although IHS underestimates earning, this distribution still gives us information that the wage level in the country is low even for individuals who have higher education. Therefore, we can conclude that people without a diploma of higher education have difficulties competing with people with tertiary education for highly paid jobs, but that a diploma itself does not guarantee high earnings.

Furthermore, it is important to estimate earning premium for higher education in different cohorts.  Therefore, we divided the total sample into three cohorts. The first represents people with soviet education. The second represents people who gained higher education after the collapse of the Soviet Union and before the Rose Revolution. The third cohort is the new generation that gained an education after the Rose Revolution. As there is a huge amount of retired people among the first cohort, we decided to focus on the other two. People with higher education in the second cohort earn 40.6% more compared to those with general education in the same cohort. While, the same measure is slightly higher, 43.4%, for the third cohort. Therefore, we again see that there is no significant difference between earning premiums among the generation. This finding again indicates that the third problem in the educational system – low quality education - is still relevant.

WHAT ARE THE OTHER FACTORS AFFECTING THIS RELATIONSHIP?

There is a significant gender gap in Georgia, with males earning 26% - 45% more compared to women with more or less similar characteristics. Despite the large figures, the gender gap is closing over time. There are two main reasons for the high wage gap: low salaries in the sectors that are dominated by women, such as education, health and social security, and restaurants and hotel service (horizontal segregation) and lack of women in leading positions (vertical segregation) (Sefashvili 2011). The wage premium from higher education differs with gender. Males with higher education earn 39% to 41% more compared to men with general education. The same measure is higher- 49% to 52% -for female workers. This phenomenon can be explained by the fact that men without higher education are highly concentrated in the sectors with higher earnings than women without higher education.

Earnings in rural areas are 2.5% - 18% lower than earnings in urban areas rather than the capital of the country. The average earnings of people living in Tbilisi are 25% - 34% higher than in other urban areas. However, the cost of living in Tbilisi is much higher than other areas and much of the high productive and highly paid sectors are situated in the capital. Furthermore, the earnings premium of higher education in Tbilisi, other cities and rural areas are much closer, amounting to 46.3%, 42.8% and 41.9%, respectively.

It is important to determine the effect of the sectorial distribution of workers on their earnings. In our model, the base sector is agricultural, and all the other sectors are compared to it (some sectors are not presented in the table so as not to overload it). It is clear that the agriculture and education sectors are characterized by the lowest wage premium. The agricultural sector has the highest concentration of people without higher education (65% have a maximum of upper secondary education) that partially explains lower productivity and relatively lower wages in this sector.

In the education sector, more than 75% of people have higher education and 14.57% professional education, but the earnings premium is still extremely low. In addition, according to the recent statistics of Geostat, the education sector was the lowest paid sector in the fourth quarter of 2016, where the average salary of hired workers was only 589.2 GEL, that is 71 GEL lower than the average salary of the second lowest agricultural sector, 476.7 GEL lower than the average salary of the country and 3.43 times lower than the average salary of the highest paid financial sector. This statistic again gives us reason to be concerned, as low paid teachers and lecturers lose motivation to teach students and young talented undergraduates have no incentives to become teachers or lecturers.  Furthermore, lower motivation and lack of qualification leads to low quality education. Only the relatively less skilled undergraduate students (of course, with the exception of talented enthusiasts) will choose this profession, further reducing motivation and the qualification of future teachers and lecturers. Therefore, Georgia is in a vicious circle and should try its best to find a way out.

This blog is based on the research performed by ISET-PI team for the Asian Development Bank “Good Jobs for Inclusive Growth” project.