Does school Matter? Learning outcomes of Indonesian children after dropping out of school

Indonesia has made significant progress in increasing educational attainment. Whether more years of schooling result in more learning, however, is uncertain and may often depend on long-run factors such as child ability and parental background. In this paper, I use data from the period around the Indonesian economic crisis of late 1990s to analyze how learning is affected by school dropout due to short-run budget constraints. I estimate a value-added model, taking advantage of the availability of test scores before and after dropout, in order to account for children selecting out of school based on ability. I further estimate an instrumental variables regression model to identify children who drop out because of resource constraints that bind during the crisis. The study finds economically and statistically significant negative effects of school dropout on mathematics scores (obtained through formal training) and a smaller effect on Raven’s scores (a general measure of cognition). These findings show the importance of insuring Indonesian children against income volatility because more schooling is associated with more learning even for these marginal children who drop out during a period of binding resource constraints.