Externalities of Education within the Household: The Case of Indonesia

This paper assesses the existence and extent of educational externalities at household level. The study has three objectives: firstly, to test the hypothesis that externalities within the household occur. Secondly, to demonstrate that their magnitude depends on the educational level of both the recipient and the source of the externality. Finally, the study attempts to identify the main trends when knowledge diffusion between different members of the household takes place. Using data from the first wave of the Indonesian Family Life Survey, conducted in 1993 the paper tests the hypothesis that knowledge diffusion from a more to a less educated individual in the household will result in a positive and significant effect on the latter's productivity. The result shows that less educated adult workers living in a household, with at least one member having a higher educational level than they possess, will have a higher hourly wage level. The above effect is estimated for different recipients and sources of the externality according to their personal education level and sex. The main findings resulting from the estimation suggest several trends: on the one hand the magnitude is higher when knowledge is diffused between individuals of the same sex. On the other hand, when educational gap between source and recipient increases, so does the effect of the externality.