Social Return to Education in Indonesia: Evidence from District Panel Data

The research aimed at establishing causal effect relationship for district level social return to education by examining the relationship between years of education and educational composition of labour force to district per capita GRDP. The research used district panel data covering 261 Indonesian districts during the period of 1993-2003. Fixed effect estimation was employed to tackle permanent differences in district unobserved heterogeneity, while GMM estimation was used to tackle the reverse causality from per capita GRDP to educational variables. The Generalized Model of Moments estimation declares that a 1 increase in year of education indeed gives rise to 8.27% increase in district per capita income. In long term perspective, the social return to education is 11.84%. Further examination using share of certain educational level of labour force provides strong tendency that pattern of the social return to education is higher for higher level of education. The long term social return to education for higher education graduates is 5.56 times stronger than primary school’s, 3.51 times stronger than junior secondary education’s and 2.21 times stronger than senior secondary education’s. Meanwhile, the short term return to education for higher education graduates is 3.69 times higher than primary school’s, 3.10 times stronger than junior secondary education’s and 2.07 times stronger than senior secondary education’s. That the social return to education goes hand in hand with the increasing level of education is contrary to the social return from full-cost method of Psacharopoulos (1981; 1982) and Kawuryan (1997).