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    01 - Human Capital and Inequality in Singapore

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    Andi Alimuddin Rauf

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    Human Capital and Inequality in Singapore* Pak-wai Liu and Yue-chim Wong Chinese University of Hong Kong I. Introduetion Development economists have long been concerned with the relationship between income growth and income distribution. Kuznets and Adelman and Morris among others have suggested various hypotheses to account for an observed regularity: the U hypothesis.t This empirical observation found in countries which have undergone economic development is quite common. Income distribution becomes at first more unequal, and only in the later stages does it become more equal. In recent years we have also seen the rapid development of human capital theory and its successful application to various social and economic behavior. One of the most actively researched areas is the personal distribution of income. There are several recent attempts to apply the human capital approach to developing ‘economies using the Mincer model.? Skeptics can object to the serious dis- ‘erepancies between the assumptions of the theoretical model and the reality in developing countries. The derivation of the Mincer earnings function proceeds from the assumption of equalizing differentials within the labor market, which is a questionable assumption for developing coun- «This study was supported by a grant from the Insitute of Social Studies and the Humanities, the Chinese University of Hong Kong. The data were collected with funds from the Ford Foundation, the Spencer Foundation, and the International Labour Organisation, Kwolching Yung and Hauowah Chui were skilful research ‘assistants, We are indebled to a referee for valuable comments. Remaining errors are tur responsibilty. Simon Kuznets, “Economic Growth and Income Inequality” American Ezo- omic Review 45 (March 1958): 1-28; and Modern Eeonomic Growth: Rate, Structure ‘nd Spread (New Haven, Conn.: Yale University Press, 1966); and Irma Adsiman and Cynthia T. Mortis, Economie Growth and Social Equity in Developing Countries (Stan- Tord, Calif: Stanford University Press, 1973), ‘For a survey of some of the literature see Mark Blaug, “The Empirical Status ‘of Human Capital Theory: A Slightly Jaundiced Survey,” Journal of Eeonomic Literature 14 Geptember 1976): 827-85; and Jacob Mincer, “Progress in Human Capital Analyses of the Distribution of Earnings,” in The Personal Distribution of Incomes, ed. A. B. [Rtkinson (London: Allen & Unwin, 1976). The Mincer model is contained in Jacob ‘Mincer, “Investment in Human Capital and Personal Distribution of Income,” Journal of Political Economy 65 (August 1958): 281-302; and Schooling, Experience and Earn- ‘ngs (New York: Columbia University Press, 1974 (hereafter cited a8 Schooling) © 1981 by The University of Chicago. 0013-0079/81/2902-0013801.00 276 Economic Development and Cultural Change tries. Whether human capital theory is relevant in a context where educa- tional opportunities are rationed by some mechanism rather than freely chosen and capital markets are seriously imperfect are also contestable issues. Most empirical studies of the human capital earnings function usually utilize cross-sectional data to approximate the life-cycle profile of a typical individual. This means that intertemporal changes will be inter- twined with human capital investment effects. In developing countries such effects may be important simply because cohort differences will be ‘much stronger in a context of rapid changes in the social and economic environment, Yet despite the skepticism the human capital model has considerable explanatory power in terms of estimated coefficients of determination, often much greater than those obtained for developed countries.» Aside from the empirical issue, the human capital model is attractive in that it provides a coherent explanation of the personal dis- tribution of income, Factors affecting variations in income, including social and institutional ones, are conceived of as working through their effects on human capital investment. In this paper we apply the strict human capital model as developed by Becker and Mincer to the analysis of income distribution in a develop- ing country: Singapore Its performance is evaluated in the light of empirical evidence. In particular we discuss the consequences of cohort effects and other social and institutional effects for the human capital ‘model. The novelty of our study is that the human capital model can be used to provide an explanation for the U hypothesis. In Section II we dis- ccuss the data set that is used in this study. Section III of our paper tests a number of well-known properties of the Mincer schooling model. The role of schooling vintages and the rela- tionship between lifetime income (human wealth) inequality and observed income inequality are discussed. A number of propositions are suggested as to why educational expansion in developing countries can lead to results that are consistent with the U hypothesis. Section IV studies the role of postschooling investment. The theoretical models of Mincer and Hanushek and Quigley are utilized to obtain estimates of the parameters {The coefficient of determination obtained by regressing log earnings against schooling, experince, and experience squared was 285 in Mincer, Schooling, using U's. data; #43 in George Pracharopouls, “Schooling, Experience and Earnings ‘The Case of an LDC." Journal of Development Economies & (December 1977): 39-48, Using Morocco data; 350 in Carmel U. Chiswick, "On Estimating Earnings Functions for LDCs," Journal of Development Economies 3 (December 1976): 67-78, using That- fand data and 405 in Pakewai Lis and Yue-chim Wong, “Schooling, Experience and Earnings in Hong Kong,” Occasional Paper (Chinese University of Hiong Kong, Eco nomic Research Centre, 1980), using Hong Kong data “Gary S. Becker, Human Capital (New York: Columbia University Press, 1964); and Human Capital and the Personal Distribution of Income: An Analytic Approach, Woytinsky Lecture 13 (Ann Arbor: University of Michigan, Institute of Public Adminis: tration, 1967); and Mincer, Schooling. Pak-wai Liu and Yue-chim Wong 27 of the implicit investment function.s Next we discuss the interacting roles of schooling and postschooling investment in human capital accumula- tion. The specific emphasis is on the interpretation of the estimates in the presence of limited educational opportunities, capital market imperfec- tions, and cohort differences. The final section presents some concluding summaries about human capital theory, income growth, and income in- ‘equality in developing countries. WL, Empirical Data Singapore presents itself as a particularly interesting case for the study of the relationship between economic growth and income inequality because it is one of the most rapidly developing countries in the world. Our study concentrates on the manufacturing sector, which has been growing phenomenally. Only Chinese workers are used to avoid racial differences in our study. They constitute 76% of the entire population in Singapore. The empirical basis of our study is a survey conducted from June to ‘August 1974, of the Singapore manufacturing sector. The sampling frame ‘was based on an industrial census listing of manufacturing establishments, employing 10 or more workers in 1973. A random stratified sample of 150 firms based on employment size in each three-digit industrial group was drawn, One hundred thirty-three firms participated in the survey. Out of 8436 male workers in the participating firms, 1,565 were randomly chosen for interviews. In all, 1,247 responded, of which 1,019 were of Chinese origin. The sample was set up to yield approximately 10 times ‘as many higher-level employees as was actually the case. As a consequence the sample was weighted to behave as a random sample. Descriptive statistics of some of the variables of the weighted sample are presented in the Appendix. IIT, Schooling Investment ‘The human capital model interprets schooling as a form of investment which augments the productivity of an individual, Therefore, economic inequality can in part be attributed to variations in the amount of school- ing in the population. The works of Becker, Becker and Chiswick, Chis- wick, Chiswick and Mincer, and Mincer are pioneering in developing such aan analysis. Mincer developed the most systematic statement of such an 3 Mincer, Schooling: and E. A. Hanushek and J. M. Quigley, “Implicit Invest- rent Profiles sn Intertemporal Adjustments of Relive Wages,” American Economic ‘evew 68 (March 1978): 67-19 "Becker, Human Capital and Human Capital and the Personal Distribution of Income: An saat Approach: Gary 8. Becker and Barty R. Chiswick, "Education and the Distribution of Earnings," American Economic Review 56 (May 1966): 358-69; Barty R. Chiswick, Income Inequality: Regional Analyses within a Human Capital Framework (New York: Columbia University Press, 1978); Barry R. Chiswick and 278 Economic Development and Cultural Change approach. He obtained in the absence of postschooling human capital investment a simple relationship between schooling and earnings.” In Vy =n Yor, a where Y, and Y, are the earnings of an individual with S and 0 years of schooling, respectively: r is the discount rate and may be interpreted as the rate of return to schooling; and S is the completed years of schooling. ‘The assumptions underlying equation (1) are well known and have been thoroughly discussed in Mincer and Blinder.* We shall not repeat what is by now well known in the literature, As it stands now equation (1) cannot be directly estimated using cross-sectional individual data because post- schooling investment is not held constant. This omission results in a classic left-out variable problem that results in downward-biased estimates of the schooling coefficient. In the cross section, younger cohorts would have shorter years of experience and so less opportunity for postschooling investment. Furthermore, if younger cohorts also have more schooling ddue to secular trends, then the left-out postschooling investment variable ‘would be negatively correlated with schooling in cross-sectional individual data, Regressing equation (1) within experience groups provides only part of the solution to the problem of estimating the schooling model. This is because in the presence of postschooling investment, potential earnings differ from observed earnings by the value of the human capital invested in each period. In order to separate out effects of schooling and post- schooling investment Mincer’s concept of “overtaking” is crucial. This ‘means that equation (1) should be estimated in the year of experience when ‘observed earnings equal potential earnings immediately prior to entry into the labor market. It is at this stage alone that observed carnings would be least contaminated by postschooling investment, This concept also implies that the explanatory power of the schooling model would be at its maxi- ‘mum in the overtaking year of experience. Equation (1) was thus est mated for various experience groupings by means of ordinary least squares. The dependent variable used was the log of the wage rate. Hall ‘and Blinder have suggested that the wage rate may be a more appropriate specification of the strict human capital model than earnings, since it is ‘a better proay for productivity and is less burdened by work effort con- Jacob Mincer, “Time-Series Changes in Personal Income Inequality in the ‘States since 1939, with Projections to 1985," Journal of Political Economy 80 Sune 1972), S3-S66; and Mincer, “Progress in Human Capital Analyses ofthe Distri- ution of Earnings" "Investment in Human Capital and Personal Distribution of Tcome,” and Schooling "TMincer, Schooling, pp. 9-11 'Mincer, Schoolig, chap. Iz and Alan S. Blinder, “On Dogmatism in Human Capital Theory.” Journal of Human Resources 11 (Winker 1976): 8-22, Pak-wai Liu and Yue-chim Wong TABLE 1 ScHoOLING REGRESSIONS WITiHN ACTUAL EXPERIENCE GROUPS r BY ann =O 522 ERG sid as 37 360 820 woe Tas 8 si) 338 Bot kes 8B os 40GB ost ae Ba Soi 403,87 bee 782 03 Ta 4 380708 3700 bse 348 2236 set 34 G0 a Bas oss a7 38S Ost 363384389 oeffcient of determination, r log hourly wages, (In) = variance of fog hourly wages, 8 = mean years of schooling, and «(S) = variance of years of schooling ate of return to schooling, siderations.» Table 1 gives regression estimates of the schooling coefficient (P) and the coefficient of determination (R2) for various overlapping sets of years of actual experience.'? As is apparent the coefficient of determina- tion rises to a peak after 7-10 years of actual experience and declines sub- sequently. This is consistent with the prediction of the human capital schooling model. Equation (1) can be further expressed in variance form by a famous theorem formulated by Goodman upon assuming that the discount rate (r) and the level of schooling are uncorrelated :11 a*(ln ¥,) = PoX(S) + Sor) + oF(S)o*(Y) @ If we ignore variations in the discount rate, equation (2) predicts that the variance of log wages would be larger the greater is the variance in years of schooling. This pattern is clearly borne out by figures given in table 1 for various experience groups. Having determined the overtaking year of experience, the schooling ° Robert E. Hall, review of Schooling, Experience, and Earnings, by Jacob Journal of Poiical Economy 83 (April 1975): 444-46; and Blinder. 1 The survey ineludes a question asking for the actual number of years worked by the respondent; this serves as our measure of the actual years of experience. "Leo Goodman, “On the Exact Variance of Products," Journal of the American ‘Statistical Assocation 88 (December 1960): 708-13. 280 Economie Development and Cultural Change ‘model can be fitted to individuals in this group to establish the true effect of schooling on the dispersion of wages. After a certain amount of experi- mentation the best fit was obtained in experience sets that were centered around the eighth year of experience. The regression results of equation (I) estimated in the overtaking set with 7-9 years of actual experience and in the aggregate sample are reported in table 2. The estimated rate of return to schooling is 13.4% in the overtaking set and 8.5% in the aggre- gate set. The explanatory power of the schooling model is 60% in the overtaking set and 24% in the aggregate set. The greater applicability of the schooling model to the overtaking set than to subsequent stages of experience or to the aggregate set is evident. Since at overtaking the school- ing model standardizes for variations in postschooling investment, it is possible to obtain an indirect estimate of the potential explanatory power of the distribution of human capital in accounting for the overall variance of log wages in the aggregate sample. This can be done by using the esti- mated residual variance of the regression in the overtaking set. Mincer developed the following formula for this purpose:!? potential explanatory power ‘The resulting computation implies that variations in human capital alone can account for atleast 56% of the dispersion of log wages in the aggregate sample, This remains an understatement because schooling quality is not held constant. So far the empirical tests of the human capital schooling ‘model have confirmed its usefulness in explaining wage variations in developing countries. It is interesting to note that the dispersion of log wages in the over~ taking set as measured by variances is 400 and is greater than that in the TABLE 2 [SCHOOLING REGRESSIONS IN OVERTAKING "AND AGGREGATE SETS Overtaking Aggregate Set Set ss. be ‘08s aso, aso, Constant. cece SE rnsegtence 396 22 Mean's. sae ce Variance $0000000) 1330, 2st Mean In. as 26 Variance In. “400 a3 Residual Variance 163 283 ‘Nore tevalues in patentee, The over taking set is dofined as 7-9 year actual experience. "Vis the hourly Wage in 1974 Singapore dollars 8 Mincer, Schooling, pp. 34-96. Pak-wai Liu and Yue-chim Wong 281 aggregate sample, which is only .373. Similarly, the variance of schooling in the overtaking set is 13,27 and is also greater than that in the aggregate set, which is only 12.61. Both of these findings are contrary to the findings for U.S. data.!} They are similar to those in the studies by Psacharopoulos for Morocco data and Liu and Wong for Hong Kong data.'¢ This seems to suggest that income inequality patterns are quite different for developed ‘and developing countries. Mincer suggested that the variance of log earn- ings in the overtaking set is a measure of lifetime inequality by virtue of the assumption of equalizing differentials. As such, our results suggest that inequality so measured is at least as great as observed inequality. ‘This is contrary to the predictions of human capital theory because life- time earnings standardize for variations in the length of time an individual js exposed to the labor market. In a purely statistical sense our findings for the behavior of log wase variances can in part be explained by the behavior of schooling variances, ‘Table 1 shows that schooling variances within experience groups are not too dissimilar for higher-experience groups. It is only for experience years that are less than seven that we observe a substantial reduction in school- jing variances. Since individuals in such experience brackets constitute some 40% of the entire sample, this would explain why it is possible to have a greater schooling variance in the overtaking set than in the aggre- gate set, We know that individuals with less years of experience in cross- sectional data typically belong to a younger cohort. This means that the ‘observed pattern of schooling variances for various experience groups implies that the distribution of schooling is much more equal among younger cohorts, an expected consequence of the rapid expansion of educational opportunities over time. This is evident from figures in table 1 which show that years of schooling are much higher for lower-experience ‘groups than for higher ones. The differences are much greater than those jin U.S. data. All this means that a substantially larger proportion of individuals in the younger cohorts would have better schooling than those in older cohorts as compared with this proportion in developed countries, 18 Mincer, Schooling, found in the overtaking set (7-9-year experience) a variance of log earings equal to 52 and a variance of schooling equal to 7.7. Tn the aggregate Sc the variance of log earnings equals .67 and the variance of schooling equals 12.25. Ts George Psacharopoulos found in the overtaking set (5-8-year experience) a vati- ‘ance of log earnings equal to .69 and variance of schooling equal to 15.5. Inthe aggre- {atest the variance of log earnings equals 68 and the variance of schooling equals 213. {Tin and Wong found in the overtaking set (10-13-year experience) a variance of log ‘earnings equal to. 99 and a variance of schooling equal ‘021.37 Inthe agatezateset the ‘arlance of log earnings equals .68 and the variance of schooling equals 17.53. TE Mincet, Schooling Lee A, Lillard (“The Distribution of Earnings and Human Wealth in @ Lik-Cycle Context,” in The Distribution of Ezonomic Well-Being, ed. F. ‘Thomas Juster, NBER: Studies in Income and Wealth, vol. 41 (Cambridee, Mass Ballinger Publishing Co,, 1977) gives an empirical analysis of why human wealth is more equally distributed thao earnings. TSCohort diferences in schooling attainment are S07 greater in our sample than in Mincer’s US. data 282 Economie Development and Cultural Change This implies that higher levels of schooling attainment among younger cohorts would partially compensate for their shorter postschooling invest- ment period. Therefore, the variance of log wages in the aggregate sample would be relatively smaller, due to less difference in accumulated human capital stocks across cohorts, than it would otherwise be. ‘Human capital theory tells us that the marginal costs to human capital investment increase over the life cycle, whereas that of marginal benefits ‘decrease, This means that older cohorts will not benefit as much from rapid expansion of educational opportunities. This is particularly so because the marginal cost to human capital investment rises rapidly at higher rates of investment. Therefore, the rapid expansion of educational opportunities in a developing country can work to increase lifetime earnings inequality simply because benefits are not distributed equally across cohorts. It is possible that only with the passing away of older cohorts over time will the distribution of lifetime earnings become equal. This is likely to be the cease since schooling variances are much lower in younger cohorts, as is evident from table 1. Such considerations suggest that the U hypothesis ‘on income inequality can be generated in part by differential human capital stocks that are accumulated across cohorts. These effects would be stronger if the secular increase in schooling included quality effects as well. Further more, in a rapidly changing economy the obsolescence of knowledge of ‘older vintages could be great. This means that observed wage differences between older and younger cohorts would be narrowed. The decay of the schooling coefficient in the higher experience groups in table 2 provides some evidence for the existence of such vintage and quality effects. This type of cohort effect would be much greater in the aggregate sample than in any subsample based on experience groups. This is because within any subset the variation in schooling vintages would be much smaller. To the extent that it still exists the estimated rate of return to schooling would be biased downward. Cohort effects are not limited to schooling invest- ment considerations. Postschooling investments are similarly subjected to them, Their analysis will be taken up in the next section, IV. Postschooling Investment ‘An individual typically continues to invest in human capital even after the period of formal schooling. Theoretically, the decision to invest depends on both supply and demand factors. On the supply side it includes the ability to produce human capital, access to capital markets, initial ‘endowments, and the discount rate. On the demand side, firms have an incentive to invest in their employees and, given the uncertainties of turnover, there could exist an optimal sharing of the costs and returns to human capital investment between the firm and the worker. Human capital theory predicts that the amount of investment would in general decline over the life cycle due to rising marginal costs and falling marginal Pak-wai Liu and Yue-chim Wong. 283 benefits. The manner of this decline is not easy to determine in the absence of explicit data on postschooling investment. To investigate this relation- ship we follow procedures developed by Mincer (Schooling, Experience ‘and Earnings) and Hanushek and Quigley. Mincer defined the investment ratio, k,, as the ratio of the dollar cost ‘of human capital investment to potential earnings at period ¢ in the work span. Such costs may be in the form of direct outlays or foregone earn- ings. The investment ratio so defined may be interpreted as the fraction ‘of working time that an individual spends in investment at period f. Since postschooling investments are usually part-time activities, k; would necessarily be less than unity. The total amount of time that an individual spends in postschooling investment can be obtained by integrating ky ‘over all working periods. This leads to a simple relationship between potential earnings and human capital investment:17 In Wy =n We + 1S reek, @ where W; is potential earnings in period £; 1, is potential earnings of an individual with no schooling and postschooling investments; r, is the discount rate for postschooling investment; and Z is the length of the work span. The interpretation of equation (3) is straightforward: each additional unit of time spent in postschooling investment increases relative potential earnings by an amount equal to the discount rate. ‘Since potential earnings are not observable in the presence of post- schooling investment, estimating equation (3) necessitates the use of ob- served earnings, Yi, as the dependent variable, which is related to potential earnings as follows: Yes Wl — by) @) However, k; is not directly observable either. Estimation of equation (3) requires the specification of an explicit funetional form for k,. We assume that &, declines linearly over time as follows: fe (6) where ky is the initial investment ratio; ¢ is a time index; and T is the terminal period of positive investment. Substituting equations (4) and (5) into (3) and integrating, we obtain the following earnings function, which is approximated to a second-order Taylor series expansion: In Ye In W. = — [tate wr (a d)eetlarpatns | 1 Mincer, Schooling, pp. 11-23 288 Economic Development and Cultural Change With only two experience terms, equation (6) cannot be used to identify the three relevant parameters of the linear investment profile: ke fm and T. Furthermore, in cross-sectional data the Mincer earnings function does not permit the separation of the different effects of aging (or maturation) and market experience on human capital investment. In developing countries where secular trends ate operative, intertemporal differences could give rise to different valuations of postschooling human capital stocks due to vintage effects and obsolescence. Even individuals with the same years of actual labor-market experience may still differ with respect tothe time of entry ito the labor market, Such cohort effects are, ina sense, aging effects that come into operation upon entering the labor market. Hanushek and Quigley have developed a convenient method for analyzing such issues. We define potential experience, P, as the length of time elapsed since the completion of schooling; and actual experience, X, a the length of time that is actually spent working in the labor market. The quantity X is necessarily les than or equal to P. Its assumed that an individual spends a constant proportion, z, of his work- ing time per period actually working in the labor market. This implies that the investment ratio during each year of potential experience will be: £ o M$ Substituting equations (7) and (8) into (3) and integrating from 0 to P and utilizing the relationship X = gP, one can solve explicitly the Hanushek- Quigley earnings function. Approximating to a first- and second-order Taylor series expansion yields the following two equations, respectively: We kts XEN P tye, wwreeiny. A (14) ese tea eae Ba @ rake Op XP + tokeP Equation (8) has three experience variable coefficients and equation (9) has four. Therefore, the three parameters of the linear investment profile are exactly identified in equation (8) and overidentified in equation (9) Equations (6), (8), and (9) were estimated by ordinary least squares with the dependent variable defined as the log of the wage rate. The three sets of regression estimates are reported in table 3. The estimated rate of 18 Hanushek and Quigley (pp: 68-70) give a similar formulation. Equation 1) appears to suggest thatthe more time people work during the year, a, the smaller the investment ratio, kx. However, this s more apparent than real. With linear investment profiles, an increase in while holding T constant necesarly implies a higher ky. On the other hand, holding & constant would necesaely imply lower when g i creased. T and ke are not independent of. Pak-wai Liu and Yue-chim Wong 285 TABLE 3 [Mince AND HANUSUEK-QUIGLEY REGRESSIONS HANOsHEK-QuicLey Finst-OnbE HANUSHEK-QUIGLEY SEOOND-OnDER Mincen Pooled Primary Secondary ‘Tertiary ‘Pooled ‘Primary Secondary ‘Tertiary Sone in 6 oe 1a “Ws 26 oa ane 063 ass) G3) SH) WOT) SSH GO WG) x, ‘0g ‘9 ‘oo os S009 ioa5 ‘on ore “03 (482) SS.) GSH) 8) 9) sm) RS) 2210 ~o10 ‘008 008 ‘908 022 38) 09) wah P/O. —o10 —007 012,006 1S “030 ao 6) GG) ay Pestestesdsers fart D6 ‘or al ost oe om o3) ean, G8) 666) 63 Conte = Sie Sos See S505 Sal Bec 4a9 ast 185 333 ‘467 Sal Semple 002,019 019 388) ie 1019 ie Nors.—The reported sample sizes in the schooling groups are adjusted for degres of freedom due to weighting and should not be taken to be representative ofthe population; r-values in parentheses. 286 Economie Development and Cultural Change return to schooling is 11.3% for the Mincer function and 12.6% for the Hanushek-Quigley functions. Both estimates are substantially lower than that obtained in the overtaking set. This confirms our earlier suggestion that there are stronger cohort effects in the aggregate sample than zt over- taking. That the Mincer estimate is even more downward biased than the Hanushek-Quigley estimate is to be expected because the inclusion of a potential experience variable in the latter estimate removes some of the cohort effects. The parameters of the investment profile can be derived from the estimated coefficients of the earnings functions. For the Mincer function a value for T'was obtained by inspection of plots of log wage experience profiles for different schooling groups. This was used to identify the parameters. The peak in the profiles gives a rough estimate of the length of the total investment period T which is biased upward by at most I/ry due to depreciation.!? The observed peak of log earnings occurred approximately in the twenty-fifth, thirtieth, and thity-ffth year of experi- ence for the primary, secondary, and tertiary schooling groups, respec- tively.2# This suggests that a reasonable value of Tis in the range of 20-25, In calculating the values for the second-order Hanushek-Quigley function which is overidentified, we decided to omit the coefficient of the quadratic actual experience term, which is statistically insignificant. The various computed parametric values are given in table 4. It is difficult to determine hhow precise these estimates are. The second-order Hanushek-Quigley estimates yield values that are very similar to those obtained from the Mincer estimates with an assumed T of 25. The postschooling rates of return to human capital investment are found to be 13.9% and 14.6% and are quite similar to the estimated rate of return to schooling in the over- taking set. The initial investment ratios are .322 and .290, which imply that postschooling investment declines at about 30-40 hours per year on the assumption that the full-time work year is 2,500 hours. On the other hand, the first-order Hanushek-Quigley estimates yield values that are remarkably close to those obtained from the Mincer estimates with an assumed T of 20, The postschooling rates of return to human capital invest- ment are 6.4% and 6.7%, with initial investment ratios of .453 and .553 implying a rate of decline of postschooling investment of 55-75 hours per year. AS is evident the estimates are sensitive both with respect to func- tional form specification and presumed values of T. A rough check for consistency may be used by noting that overtaking must occur before I frp years of experience! This means that, with a 14% postschooling rate of return, overtaking would occur within 7 years of experience; whereas, 19 Mincer, Schooling, pp. 21-22. 2 The division is based on the British system. Primary education lasts 6 yr Secondary education includes all levels of pre-universty education and lasts 6-7 yr ‘Tertiary education includes all postsecondary education levels, university, postsecondary college, and vocational college. 2 Mineer, Schooling, p17 Pak-wai Liu and Yue-chim Wong 287 ‘TABLE 4 MeeLiED PosTscHOOLING INVESTMENT PARAMETERS HANusttk-QUIGLEY StCOND-ORDER Hawusien-Quiotey Furst-Onper MINER 20 —T=25 Pooled Primary Secondary ‘Pooled Primary Secondary 139 ons on r 198 201 a2 365 582 39 252 2s 16 wr 0 Be =013 =o 33

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