Determinants of Wage Structure and Returns to Education in a Developing Country : Evidence from Linked Employer-Employee Manufacturing Survey Data of Ethiopia

Abstract

This study estimates the returns to education for workers in the Ethiopian manufacturing sector, and investigates additional determinants of hourly wages other than education. It starts the analysis using the standard framework of a Mincerian earnings function focusing on individual level characteristics as determinants of wages. The standard framework (basic Human Capital Model) is then augmented by controlling for firm level characteristics that are believed to play important roles in wage determination. In the basic model, the returns to one year of schooling for an Ethiopian manufacturing worker is around 10% for both men and women in the basic model - which is relatively small compared with estimates for other developing countries. When additional variables including firm level characteristics are controlled for, the returns to education go further down to about 8% for men and 9% for women. Conditional on schooling, the basic model estimates show that each additional year of labor market experience increases hourly wages by 6.0% for men and by 7.8% for women.