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Education and income determination in Kenya
600
Book reviews
higher, while the rate of profit is evidently lower, is therefore missed. If this was not the case, i.e., if it had been possible to disaggregate factor markets so as to distinguish public from private sector employment (of both labor and capital), then a much richer portrayal of the two parts of the economy and their interdependence would most likely have emerged. For example, a stimulus to the public sector of the economy might then have been seen as increasing household income inequality while having a relatively small effect on government revenues. Indeed, through taxes on private profit, government revenues might well gain more from a comparable stimulus to the private sector. Such prospective results are clearly of great interest. They encourage more general questions as to the next steps in the field of investigation which this monograph has opened up. My own response is to say that, first, more work on data is dearly needed. This should bring together in the institutional accounts of the SAM details of government current and capital expenditures as well as those for state enterprises. And this information should be integrated with corresponding details for the tax system. We then need disaggregation of the factor accounts, as discussed above, and to combine this with the details of production structure on which Pleskovic and Trevino have made most progress. And, secondly, given such a data base, we need some more sharply focused analytic questions. My preferred starting point in this area would be to explore the effects of factor price distortions: what would the price structure be if the public and private rates of return on capital or wages in the two sectors were equal, and what would be the effects on public finance? From this starting point the impact of the public sector in terms of who gains and who looses from its activity could then be developed on a variety of fronts. The invitation extended by the monograph under review is in effect to set the agenda of public economics in a SAM context. Not only would this help a good deal in establishing the facts. It would also help analysis, not least by encouraging a general equilibrium perspective on the issues. Graham Pyatt The World Bank, Washington, DC
Arne ,Bigsten, Education and Income Determination in Kenya (Gower Hampshire, 1984)pp. vii+ 156, $27.50. The book begins with a discussion of the evolution of the Kenyan labour market since 1900. The author describes how the trade unions emerged with difficulty during the early part of British rule, represented a major political
Book revzews
601
force during the struggle for Independence, but since then have been largely under the thumb of the government. He cites evidence that in the fifties the system of minimum wages raised the starting wage above the supply price of labour, thus creating a problem of urban unemployment. However, in the seventies, although the government has pursued an incomes policy, Bigsten shows that settlements have been well within the guidelines and concludes that it is the underlying economic situation that has determined the rate of increase of wages. Similarly he suggests that while in the early sixties the public sector was a wage leader, more recently the government has only managed to influence salaries within the civil service itself. The conclusion is that the impact of policy on wages in Kenya has been declining. Chapter 3 describes the differences between the urban and rural labour markets. The urban labour force is found to be much more highly educated than the rural one. There is a wide variety of skilled jobs in the urban areas, but in the rural areas teaching jobs predominate. The analysis of the determinants of earnings in the formal labour market forms the core of the book. After exhaustive estimation of earnings functions Bigsten concludes that human capital explains a large part of the variance in earnings and that institutional factors are less important. Nevertheless he finds evidence of some labour market segmentation; males are paid more than females in the urban labour market, and public employees are highly paid compared to private employees in the rural areas. The occupation dummies are generally significant; for example, workers in professional categories earn more than general labourers. There is also evidence of segmentation by sector, with workers in agriculture and' mining earning significantly less than those in trade or services. Finally he finds a substantial wage gap between urban and rural workers. There remains the question of the underlying causes of these differences. Workers in certain occupations may have special types of human capital that are not measured with available data. Higher wages in a sector may be due to institutional factors, but alternatively it may be optimal for firms in some sectors where there is specific training to pay higher wages to reduce turnover. Bigsten emphasizes that in the current study it is not possible to distinguish between these and other explanations and that further research is warranted. Competitive theory leads to various predictions concerning the impact of rapid educational expansion on the labour market. Bigsten presents various estimates of the rate of return to education. These estimates for 1977/1978 are compared with estimates from an earlier study when the supply of educated labour was much less. The rate of return to primary and university education is found to have fallen considerably, supporting the hypothesis that labour was fairly competitive in the seventies. Returns to secondary education remain high, however. Chapter 5 looks at changes in the market
602
B o o k remews
for high level manpower in Nairobi between 1972/1973 and 1979. The real income of all categories of highly skilled labour has fallen since 1972, again suggesting that the market for skilled labour is functioning fairly competitively. The dispersion of earnings among those of the same rank decreased, implying increased labour market integration over the period. The authors recognizes that these rate of return estimates are flawed because the sample includes only those with wage income. The formal market for wage labour represents less than a quarter of the labour force, with the rest working on smallholdings, in the informal sector or unemployed. Since Independence the supply of educated labour has increased rapidly, and continues to increase, while recently the growth of the formal wage sector has slowed markedly. As is shown in Chapter 3, the current stock of secondary or more school leavers is small. However, it seems likely to rise considerably in the future as school leavers are unable to find employment in the urban formal wage sector. Bigsten cites evidence that the propensity of educated labour to migrate to the urban areas declined during the seventies. He also demonstrates that formal sector wage jobs for skilled workers are extremely limited in the rural area. Given the high level of expenditure on education in Kenya today it is very important to know what the return to this investment is. Yet the answer depends more and more on the impact of education on the productivity of smallholders in agriculture. Chapter 6 looks at the relationship between education and smallholder income. Bigsten estimates various farm production functions that include the education of the household head as a shift factor in order to test whether education enables farmers to combine given inputs more efficiently. He finds that education does not seem to have a direct effect on the productivity of given inputs. There remains the possibility that educated farmers are more likely to be innovative and select a better choice of inputs. Bigsten shows that agriculture innovations are significant determinants of agricultural income, but that education does not appear to increase the propensity to adopt innovations. Finally he estimates that regular employment income has a large significant impact on the propensity to innovate and hence on farm income. Education has an indirect positive impact on farm income through facilitating access to wage employment and hence increasing the propensity to innovate. While educational expansion may improve rural income distribution through spreading opportunities of access to wage employment more, equally, it will not increase growth because it merely re-allocates a given set of wage employment opportunities. This book is extremely clearly written and provides a comprehensive picture of the Kenyan wage labour market. Limitations of the data and the analysis are fully recognized and discussed. To answer completely the question of the impact of education on income in Kenya further research is
Book reviews
603
needed, focusing on where the large numbers of recent school leavers end up, and on their incomes. The brief analysis of education and rural incomes in Chapter 6 does go at least part of the way to answering this question. Jane Armitage The World Bank, Washington, DC
Book reviews
higher, while the rate of profit is evidently lower, is therefore missed. If this was not the case, i.e., if it had been possible to disaggregate factor markets so as to distinguish public from private sector employment (of both labor and capital), then a much richer portrayal of the two parts of the economy and their interdependence would most likely have emerged. For example, a stimulus to the public sector of the economy might then have been seen as increasing household income inequality while having a relatively small effect on government revenues. Indeed, through taxes on private profit, government revenues might well gain more from a comparable stimulus to the private sector. Such prospective results are clearly of great interest. They encourage more general questions as to the next steps in the field of investigation which this monograph has opened up. My own response is to say that, first, more work on data is dearly needed. This should bring together in the institutional accounts of the SAM details of government current and capital expenditures as well as those for state enterprises. And this information should be integrated with corresponding details for the tax system. We then need disaggregation of the factor accounts, as discussed above, and to combine this with the details of production structure on which Pleskovic and Trevino have made most progress. And, secondly, given such a data base, we need some more sharply focused analytic questions. My preferred starting point in this area would be to explore the effects of factor price distortions: what would the price structure be if the public and private rates of return on capital or wages in the two sectors were equal, and what would be the effects on public finance? From this starting point the impact of the public sector in terms of who gains and who looses from its activity could then be developed on a variety of fronts. The invitation extended by the monograph under review is in effect to set the agenda of public economics in a SAM context. Not only would this help a good deal in establishing the facts. It would also help analysis, not least by encouraging a general equilibrium perspective on the issues. Graham Pyatt The World Bank, Washington, DC
Arne ,Bigsten, Education and Income Determination in Kenya (Gower Hampshire, 1984)pp. vii+ 156, $27.50. The book begins with a discussion of the evolution of the Kenyan labour market since 1900. The author describes how the trade unions emerged with difficulty during the early part of British rule, represented a major political
Book revzews
601
force during the struggle for Independence, but since then have been largely under the thumb of the government. He cites evidence that in the fifties the system of minimum wages raised the starting wage above the supply price of labour, thus creating a problem of urban unemployment. However, in the seventies, although the government has pursued an incomes policy, Bigsten shows that settlements have been well within the guidelines and concludes that it is the underlying economic situation that has determined the rate of increase of wages. Similarly he suggests that while in the early sixties the public sector was a wage leader, more recently the government has only managed to influence salaries within the civil service itself. The conclusion is that the impact of policy on wages in Kenya has been declining. Chapter 3 describes the differences between the urban and rural labour markets. The urban labour force is found to be much more highly educated than the rural one. There is a wide variety of skilled jobs in the urban areas, but in the rural areas teaching jobs predominate. The analysis of the determinants of earnings in the formal labour market forms the core of the book. After exhaustive estimation of earnings functions Bigsten concludes that human capital explains a large part of the variance in earnings and that institutional factors are less important. Nevertheless he finds evidence of some labour market segmentation; males are paid more than females in the urban labour market, and public employees are highly paid compared to private employees in the rural areas. The occupation dummies are generally significant; for example, workers in professional categories earn more than general labourers. There is also evidence of segmentation by sector, with workers in agriculture and' mining earning significantly less than those in trade or services. Finally he finds a substantial wage gap between urban and rural workers. There remains the question of the underlying causes of these differences. Workers in certain occupations may have special types of human capital that are not measured with available data. Higher wages in a sector may be due to institutional factors, but alternatively it may be optimal for firms in some sectors where there is specific training to pay higher wages to reduce turnover. Bigsten emphasizes that in the current study it is not possible to distinguish between these and other explanations and that further research is warranted. Competitive theory leads to various predictions concerning the impact of rapid educational expansion on the labour market. Bigsten presents various estimates of the rate of return to education. These estimates for 1977/1978 are compared with estimates from an earlier study when the supply of educated labour was much less. The rate of return to primary and university education is found to have fallen considerably, supporting the hypothesis that labour was fairly competitive in the seventies. Returns to secondary education remain high, however. Chapter 5 looks at changes in the market
602
B o o k remews
for high level manpower in Nairobi between 1972/1973 and 1979. The real income of all categories of highly skilled labour has fallen since 1972, again suggesting that the market for skilled labour is functioning fairly competitively. The dispersion of earnings among those of the same rank decreased, implying increased labour market integration over the period. The authors recognizes that these rate of return estimates are flawed because the sample includes only those with wage income. The formal market for wage labour represents less than a quarter of the labour force, with the rest working on smallholdings, in the informal sector or unemployed. Since Independence the supply of educated labour has increased rapidly, and continues to increase, while recently the growth of the formal wage sector has slowed markedly. As is shown in Chapter 3, the current stock of secondary or more school leavers is small. However, it seems likely to rise considerably in the future as school leavers are unable to find employment in the urban formal wage sector. Bigsten cites evidence that the propensity of educated labour to migrate to the urban areas declined during the seventies. He also demonstrates that formal sector wage jobs for skilled workers are extremely limited in the rural area. Given the high level of expenditure on education in Kenya today it is very important to know what the return to this investment is. Yet the answer depends more and more on the impact of education on the productivity of smallholders in agriculture. Chapter 6 looks at the relationship between education and smallholder income. Bigsten estimates various farm production functions that include the education of the household head as a shift factor in order to test whether education enables farmers to combine given inputs more efficiently. He finds that education does not seem to have a direct effect on the productivity of given inputs. There remains the possibility that educated farmers are more likely to be innovative and select a better choice of inputs. Bigsten shows that agriculture innovations are significant determinants of agricultural income, but that education does not appear to increase the propensity to adopt innovations. Finally he estimates that regular employment income has a large significant impact on the propensity to innovate and hence on farm income. Education has an indirect positive impact on farm income through facilitating access to wage employment and hence increasing the propensity to innovate. While educational expansion may improve rural income distribution through spreading opportunities of access to wage employment more, equally, it will not increase growth because it merely re-allocates a given set of wage employment opportunities. This book is extremely clearly written and provides a comprehensive picture of the Kenyan wage labour market. Limitations of the data and the analysis are fully recognized and discussed. To answer completely the question of the impact of education on income in Kenya further research is
Book reviews
603
needed, focusing on where the large numbers of recent school leavers end up, and on their incomes. The brief analysis of education and rural incomes in Chapter 6 does go at least part of the way to answering this question. Jane Armitage The World Bank, Washington, DC