Changes in Wage Returns to Education: A Comparative Regression Analysis of the United States and Indonesia in the 1970s and 1990s

Abstract

This paper compares the wage returns to education between the United States of America and the Republic of Indonesia in two historical periods (the 1970s and 1990s) via a log-level regression of Mincer earnings functions to explore how the present relationship between education and income in both countries has been shaped by past trends in education and returns in the labor market. In essence, it asks the following research question: To what extent does an additional year of schooling affect wage returns in the United States compared to Indonesia in the 1970s and 1990s? The research finds that an additional year of schooling brings statistically more significant wage returns in Indonesia compared to the US in the 1970s and 1990s, by around 3 to 6% purely if a percentages-based relative comparison is made. Within each country, however, the effects of education on wage returns between the 1970s and 1990s vary. Returns to education for an additional year of schooling fall by 2.5% in Indonesia between 1976 and 1995. However, the returns rise in the US by 1.6% between 1970 and 1990. In consideration of other covariates, the effect of gender on wage returns is more pronounced compared to potential labor market experience and hours worked per week by the individual in question.