Lack of skilled labour is a major obstacle to achieving development goals. Kenya has devoted the largest share of its budget (29% in 1998) to expanding education. Has substantial state and private investment in education been worthwhile? How are returns to education different for men and women and for primary, secondary and tertiary education?

Research from the Kenya Institute for Public Policy Research and Analysis analyses human capital externalities (the effect that increasing the skills and knowledge of one person will impact not only returns to education for that person, but also returns to education for others). It aims to provide African policy-makers with accurate estimates of returns to education to enable them to make more informed decisions about budget allocation.

When private returns to education are estimated, it is normally assumed that returns to an individual are independent of the human capital (knowledge and skills) of others. This assumption ignores human capital externalities, a major aspect of human capital theory.

The research findings confirm that human capital has a positive effect on earnings of Kenyans. An increase in the supply of skilled males and females is accompanied by an increase in the demand for their labour services such that the demand for their improved skills exceeds the supply, leading to a net increase in earnings.

Further findings include:

• Private returns to education increase with the level of education: 7.9% for primary education, 17.2% for secondary education and 32.5% for university education.
• Returns to primary education in rural areas are higher than those for urban areas, while returns to university education in urban areas are much higher than those in rural areas.
• An increase in average human capital for females has a positive impact on earnings of male workers relative to female workers: with higher female human capital, male productivity increases, leading to an increase in demand for male workers.
• Throughout Kenya the return to primary education for males is consistently about double that for females but there is not much difference between the sexes for secondary education.

The research suggests that education policy-makers need to:

• realise that studies on private returns to education which do not take into account human capital externalities are likely to overestimate private returns to primary education and underestimate private returns to university education
• increase efforts to promote female education: if average education for females is reduced by low access to education, male productivity and earnings is likely to be reduced
• appreciate that when those with primary education work in an environment where human capital is generally improved, their productivity increases and thereby their earnings
• be aware that, conversely, the productivity of university graduates declines when they work in an environment where the educational level of most of the employees is low.

Source(s):
‘Human capital externalities and returns to education in Kenya’ KIPPRA Discussion Paper No. 13, Kenya Institute for Public Policy Research and Analysis, by D. Manda, G. Mwabu and M. S. Kimenyi April 2002 Full document.

Funded by: KIPPRA

id21 Research Highlight: 7 April 2004

Further Information:
Damiano Kulundu Manda, Germano Mwabu and Mwangi S. Kimenyi
Kenya Institute for Public Policy Research and Analysis
Bishops Garden Towers
Bishops Road
PO Box 56445
Nairobi
Kenya

Tel: +254 2 719933/4
Fax: +254 2 719951
Contact the contributor: Manda@kippra.or.ke

Contact the contributor: mwabu@form-net.com

Contact the contributor: Kimenyi@kippra.or.ke

The Kenya Institute for Public Policy Research and Analysis (KIPPRA)

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