Returns to Education in India

An individual’s choice of schooling level represents an equilibrium between the marginal rate of return to education and the marginal cost. To estimate the marginal rate of return at each schooling level, I use a Mincer type regression that is more general than in the standard literature, as well as a semiparametric approach. In light of the question raised by Heckman et. al. (1998) about the claim by Card and Krueger (1992) that the rate of return to education is constant, my results show that the rate of return to education varies non-monotonically across years of schooling in India. Based on Becker’s (1967) theory of human capital accumulation, the non-monotonic marginal rates of return suggest the presence of heterogeneity in marginal costs among individuals seeking primary education. This heterogeneity in turn implies that a large fraction of Indian society faces a credit constraint for obtaining primary education. I also compare the returns to education using hourly wages versus annual wages and find that the use of hourly wages conceals the role of education in providing stable and secure employment.