Essays on Earnings and Human Capital in Kenya

Abstract: Among Sub-Sahara Africa countries, Kenya has had a rapid educational expansion. This dissertation provides empirical analyses of the impact of education on labor earnings in Kenya, based on surveys of manufacturing firms and a survey of households in the 1990s. It consists of four papers. Paper 1 examines whether real earnings and private returns to education in manufacturing labor market changed over the 1990s. Results indicate that, real earnings standardized for differences in observed worker and firm characteristics rose over the survey period. But returns to human capital were constant. Further, the results indicate that returns to education are highest for workers in the top part of the earnings distribution, suggesting that, education worsens earnings inequality among manufacturing workers. Paper 2 uses the 2000 wave of the manufacturing firms survey to examine whether failure to control for family background in earnings functions, or to treat education as endogenous to wage formation, results in significant bias in estimates of private returns to education. Parental education has significant impact on a worker's education, and estimates of the effect of education on wages in Kenya's manufacturing that do not control for parental education are upward biased. When education is instrumented, results suggest that, standard estimates of private returns to education may be downward biased if endogenous schooling is not modelled. But this hinges on the validity and quality instruments. Paper 3 analyses a household survey to identify the impact of education on employment and earnings. All levels of education reduce the chances of agricultural employment, while higher education reduces the chances of entry into the informal sector also. Perhaps it is because education raises private and public sectors entry probabilities. Decomposition results indicate that, differences in individual and household characteristics explain a substantial part of the women-men gap in sector entry probabilities. Returns to primary education are highest in the informal sector while returns to secondary education are highest in the private sector. Women have higher returns to education than men, and selectivity controls in the earnings function indicate no evidence of selectivity bias except for women in the public sector. Paper 4 also analyses a household survey to examine the impact of education on households' economic activity combinations and incomes. Results suggest that, as education increases in the household from primary to secondary level, the tendency is to diversify income-generating activities. At higher levels of education, households tend to generate income from wage employment only. Further, the impact of education on total earned income is substantial. And while the largest impact of education is on household wage income, lower education has a notable impact on household farming income. This result is important, as many primary graduates are likely to enter the farming sector.