What is it about?

In our study, we explore the relationship between cognitive abilities, educational attainment, and earnings using data collected from South Africa between 2002 and 2014. Specifically, we examine how cognitive skills affect education and work outcomes in two contrasting environments: urban and rural areas. This differentiation allows us to understand how local labor market conditions may influence the importance of certain cognitive abilities. We draw our findings from two surveys: 1. The Health and Aging in Africa: A Longitudinal Survey of an INDEPTH Community in South Africa (HAALSI) focuses on a broader demographic. 2. The Cape Area Panel Study (CAPS) concentrates on individuals aged 14 to 22 from metropolitan regions. Here are our main takeaways: Value of Education: For the metropolitan population (CAPS), each additional year of schooling correlates with a 14% earnings increase. Meanwhile, the broader demographic (HAALSI) sees a 10% bump. These results align with previous research on sub-Saharan African populations. Using Tools to Validate Findings: We applied advanced statistical techniques to confirm our findings. When we considered the influence of schooling fees on education levels, the potential earnings increase for each additional year of schooling ranged between 18-20%. Another technique using birth data suggested an even higher potential of up to 28%, though this result was less definitive. Interestingly, these advanced methods generally indicated a higher potential return on education than our initial findings. Specific Cognitive Skills vs. General Abilities: Our research provides unique insights into the importance of specific cognitive abilities on earnings in sub-Saharan regions - a topic not often explored due to data limitations. From our findings, rural populations benefit more from executive functions like memory, while urban dwellers gain more from advanced cognitive skills. Interestingly, while numeracy was assessed in both groups, it only significantly influenced earnings in the urban setting. In a nutshell, our research underscores the nuanced interplay between cognitive skills, education, and earnings in South Africa's diverse landscapes. We highlight the potential earnings benefit of education and delve into the distinct cognitive abilities that influence these outcomes in urban and rural settings.

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Why is it important?

Education is universally acknowledged as a crucial lever for enhancing individual economic prospects. Pioneering studies by Mincer (1958, 1974) delved deep into the economic rewards associated with varying degrees of academic attainment at an individual level. Beyond monetary advantages, education has the potential to curtail crime rates, bolster health standards, and foster civic participation. There's a substantial empirical body of work that explores the monetary benefits of education across both developed and developing nations. Yet, when it comes to sub-Saharan Africa, prior empirical assessments often hinge on observational research designs. These methods fall short in discerning authentic causal links. Getting an accurate grasp on the true returns of schooling in sub-Saharan contexts is riddled with complications—ranging from econometric dilemmas and data scarcity to challenges in survey frameworks. For instance, the socio-economic profiles of households and local communities are pivotal factors influencing both educational and job market outcomes in developing nations. Why This Matters: The importance of this research lies in its potential to reshape educational policies and investment strategies in sub-Saharan Africa. If education truly holds the promise of economic upliftment, then understanding its exact value becomes imperative for policymakers. This holds especially true for regions where resources are limited, and allocation decisions can significantly influence socio-economic trajectories. By addressing the shortcomings of past research, we aim to provide a more accurate, actionable picture of education's true worth in these settings. In turn, this can guide more effective educational interventions, potentially improving the lives of countless individuals and, by extension, whole communities.

Perspectives

This paper makes four important contributions to the labor economics literature on the returns to schooling in developing countries. First, we contribute to understanding the effects of cognitive skills on the returns to education. We estimate and demonstrate the importance of specific cognitive domain proxies in the classical Mincer equation. Our results suggest that cognitive ability scores explain a sizable, positive effect on earnings and slightly diminish the effect of schooling on earnings. Related to this issue, we show that the earnings gap between blacks/coloured and whites in South Africa is considerably reduced when we account for the ability measures. These findings imply that differences in premarket skill do account for a significant portion of the earnings gap across population groups but do not seem to play a large role in the gender earnings gap in South Africa. Second, we contribute to the existing empirical literature by estimating the returns to certain dimensions of cognition that proxy for innate ability. Our results suggest that certain domains of cognition may be more important for earnings than other domains are. When we split the ability proxy into specific cognitive domain components, we find that only the numeracy domain in the CAPS sample and the memory and orientation domains in the HAALSI sample are statistically significant determinants of earnings. Third, although we rely on a limited sample size and an arguably imperfect instrument, we provide suggestive evidence of the causal estimates of the returns to schooling in South Africa by exploiting an IV estimation approach. Although the measures of cognitive skills that we use are an important proxy for ability, they are not a direct measure of ability. Nevertheless, we examine how the inclusion of proxies for ability enhances understanding of the effects of cognitive skills on the returns to education. Finally, we provide additional evidence on the returns to schooling based on two survey sources, drawn from two demographic groups. By using two distinct samples—one based in an urban setting and another based in a rural setting—with rich data on various cognitive domains, we gain a better understanding of the relationship between the returns to schooling and specific cognitive domains in two distinct settings in the context of a developing country.

Dr. Plamen Nikolov
Harvard Institute for Quantitative Social Science

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This page is a summary of: The Importance of Cognitive Domains and the Returns to Schooling in South Africa: Evidence from Two Labor Surveys, Labour Economics, May 2020, Elsevier,
DOI: 10.1016/j.labeco.2020.101849.
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