Rethinking Public Investment in Education in Africa: The Labor Market Response of Public Investment in Education in Ethiopia

This study investigates the impact of education investments on economic outcomes in Ethiopia, grounded in human capital theory and the Mincerian earnings function. While substantial public expenditure on education has resulted in a significant increase in university graduates over the past two decades, a paradox persists: high unemployment rates among graduates coexist with a notable shortage of skilled labor in firms. This research employs longitudinal data from Ethiopia's national labor force survey to explore the complexities of education returns through an over-required-under-education model, which categorizes workers based on their educational qualifications relative to job requirements. The findings indicate that government investment has successfully mitigated under-qualification but has concurrently contributed to rising over qualification, with approximately 13% of workers classified as over-qualified in 2021. Productivity analysis reveals that workers with the required educational qualifications outperform both over-qualified and under qualified peers. Notably, while under-qualified workers see positive returns from additional schooling, over-qualified workers experience negative returns, suggesting diminishing benefits of excess education. These insights highlight the critical need for policymakers to link education investments with effective human capital utilization strategies to prevent counterproductive outcomes, ultimately fostering a more productive labor market in Ethiopia.