Returns to Education and Wage Inequality in Pakistan

Return to education and wage inequality is widely debated in the literature. Many factors such as liberalization of labor and product markets, skill-biased technological change, labor force participation, taxes, and economic policies are widely recognized for the rise and fall in wage inequalities. We investigate this association in the post-reform period in Pakistan, by using the Mincerian Wage quantile regression method on data set spread over three decades. The cross-sectional data is extracted from government-sponsored labor force surveys. Age, gender, experience, marital status, educational qualifications, wages, and benefits along with household characteristics such as size, formal-informal education, employment sectors, and moonlighting status are used as variables. The log of hourly wage is used as a dependent variable. The main finding confirms that education has indeed contributed to an increasing wage inequality due to significantly different levels of educational achievements in different quantile and increasing trend in wage dispersion with the same level of education. The wage inequality is higher at higher levels of education as compares to a lower level of education across the wage distributions. The marginal return to education also indicates that return to a different level of educational qualifications has increased over time in three decades. However, the overall return to education at a different level of education has witnessed decreasing trend over time. There is no evidence found which suggests that attainment of additional qualifications has indeed any additional impact on earnings. The results also demonstrate there exists an interquartile regional wage inequality at all levels of education. Improving the quality, quantity, access, and skills with an increase in employment opportunities may likely address these wage inequalities. Policymakers need to address wage inequality and social segregation by altering the resource gaps at different educational attainment by increasing access to education and the increasing participation of women workers in the labor market. The social protection policies may further be targeted to workers who have low educational attainment and lower-wage level by increasing the level of minimum wage and by increasing access to basic services.