Returns to Education in Sri Lanka: A Pseudo Panel Approach

This study employs the pseudo-panel approach to estimate returns to education among income earners in Sri Lanka.  Pseudo-panel data are constructed from nine repreated cross-sections of Sri Lanka’s Labor Force Survey data from 1997-2008 for workers born during 1953-1974.  The results show that for males, one extra year of education increases monthly earnings by about 5 per cent using the pseudo panel estimation rather than 8 per cent as in the OLS estimation.  This indicates that not controlling for unobservables such as ability and motivation bias the OLS estimation of returns upwards by about 3 per cent on average.  It also suggests that males with higher ability seem to be acquiring more years of education contrary to what has been observed recently in countries such as Thailand (Warunsiri and McKnown 2010) where the opportunity cost of education seems to be high.