Sheepskin Effects in the Returns to Education in a Developing Country

This paper tests for the sheepskin or diploma effects in the rates of return to education in a developing country, Pakistan; presumably the only study for the country that explicitly investigates this important question. One reason for this paucity of work may have been lack of appropriate data on an individual's educational status. The Mincerian log-linear specification of the earnings function is generalized to allow for the possibility that the returns to education increase discontinuously for the years when diplomas/degrees are awarded. This provision is made in three different ways, i.e., by (a) introducing dummy variables for diploma years, (b) by specifying a discontinuous spline function, and (c) by specifying a step function. Empirical evidence based on a nationally representative sample of male earners shows that substantial and statistically significant ' sheepskin effects exist at four important certification levels in Pakistan, namely, Matric, Intermediate, Bachelor's, and Master's. This finding is consistent with the screening rather than the convential human capital view of the role of education. However, it should be noted that while diplomas seem to matter, it is not true that only diplomas matter, since even after controlling for diploma years the schooling coefficient, albeit smaller than before, is still substantial. Again, regarding the diploma effects, another interesting finding is that such effects are not significant in case of the Primary and the Middle levels of schooling. In terms of the policy implications, it follows that, in the case of Pakistan, education is an important and significant influence on the individual earnings. However, to the extent that the diploma effects are significant, the potential for education as a source of enhancing worker productivity is lessened, thus reducing the scope of an activist public policy in this regard. This is particularly true for the Secondary levels of education. In fact, the findings support a reallocation of the available public funds away from the tertiary/higher education and towards the basic education, where the productivity enhancing human capital effects are relatively more apparent.