THE CAUSAL EFFECT OF EDUCATION ON EARNINGS IN URBAN AND RURAL SOUTH AFRICA: A FURTHER UPDATE

Abstract

Providing the nation with education is primarily an important task of the government social policy, which is fixed in section 29 of the Bill of Rights of the South African Constitution, which explicitly states that everybody has the right to a basic education as well as adult basic education. Since the establishment of the democratic rule in 1994, the South African government has made significant efforts to mitigate the education inequalities promulgated during the apartheid era. The South African government considers education as a major tool of redressing the injustices created by the institutionalised policies of apartheid, which formed a discriminatory and fragmented education system in the country. Using its institutionalised policies, the apartheid system forced the African populace into homelands and/or rural areas where they were prevented from obtaining the quality of education, which might lead them to aspire to positions they wouldn’t be permitted to hold in society. Given this unfortunate condition, previous studies investigating the relationship between education and earning have not estimated separately and compared the returns to education for the full sample (South Africa) and subsamples based on urban and rural areas. This is very important, as these areas are structurally very different, with different characteristics. Thus, it is likely that the returns to education in these areas would differ, given the influence of the institutionalised policies of apartheid. Related to this point is the fact that the statistical inference of many of the earlier studies relied profoundly on crosssectional data implementing a standard ordinary least-squares model, without controlling for endogeneity bias. The purpose of this article is to reexamine the level of earnings and education in the South African labour market using all the five waves of the newly available National Income Dynamics data set observed in biennial waves over the 2008–2017 period. Based on the available literature, this article reviews information on the aggregate indicators of the Republic of South Africa and the indicators of cities and rural areas separately. Fixed effects and twostage least-squares estimators are applied. The fixed effects estimator is applied to mitigate against possible heterogeneity of the cross-sectional unit. The two-stage least-squares estimator is used to address possible endogeneity bias due to reverse causation between earnings and education. After controlling for endogeneity, we found that an additional year of education increased an individual’s earnings by 37.8 % in the full sample. Interestingly, the coefficient of education was found to be positive and statistically significant in both samples (urban and rural), reinforcing the results of the full sample. However, despite the coefficient of years of education being similar in direction (positively associated to earnings) across all samples, our results show that the education impact on individual earnings was higher in absolute values in urban areas. Thus, the 44.4 % increase of returns to education in the urban subsample was significantly higher than the increase of 33 % observed for the rural subsample. These results were to be expected, given the fact that South Africa is still battling the impact of the institutionalised policies of apartheid. In addition, we found that household size, head of household’s age and whether the head of household was married were important factors positively influencing earnings in both territorial subsamples. The policy implications derived from our empirical results suggest that the government should invest more heavily in academic infrastructure, particularly in rural areas where the poor live, so as to improve the educational attainment in those areas.

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