- What Explains Wage Differentials for Urban Wage Earners Returns to Education for Ethiopia’s Urban Wage Employed
The Ethiopian labor market is facing the dual challenge of creating new employment opportunities for the rapidly expanding labor force and improving the quality of existing jobs in the labor market. This paper estimates an earnings function for the urban wage-employed to understand how investment in human capital shapes labor market outcomes and to what extent human capital returns have been realized. The key findings show that there are significant gains associated with acquiring higher levels of education in the urban labor market. Interestingly, the analysis also finds that the margin of completed primary compared to incomplete primary education is critical in explaining earning gains. This finding has important implications for education policies in Ethiopia, a country in which about 5 percent of gross domestic product is invested in education annually, with nearly half of the budget earmarked for tertiary-level education. Understanding the returns from various levels of education, in different sectors, regions, as well as gender gaps in earnings is critical for thinking about public investment choices and labor market policies that can support nudging market inclusiveness, equity, and efficiency. Investments by the government aimed at incentivizing completion of primary education can go a long way in ensuing higher wages and improving standards of living in Ethiopia.