Learning & earning in Africa: Where are the returns to education high?

This paper investigates the role of learning - through formal schooling and time spent in the labor market - in explaining labor market outcomes of urban workers in Ghana and Tanzania. We investigate these issues using a new data set measuring incomes of both formal sector wage workers and the self-employed in the informal sector. In both countries we find significant, convex returns to education and large earnings differentials between sectors when we pool the data and do not control for selection. In Ghana there is a particularly steep age-earnings profile. We investigate how far a Harris-Todaro model of market segmentation or a Roy model of selection can explain the patterns observed in the data. We find highly significant differences across occupations and important effects from selection in both countries. The data is consistent with a pattern by which higher ability individuals queue for the high wage formal sector jobs such that the age earnings profile is convex for the self-employed in Ghana once we control for selection. The returns to education are far higher in the large firm sector than in others and in this sector they are linear not convex. In both countries there is clear evidence of convexity in the returns to education for the self-employed and here the average returns are low.