A statistical analysis of endogeneity and instrumental variables of education on income in Namibia
Loading...
Date
2024
Authors
Journal Title
Journal ISSN
Volume Title
Publisher
University of Namibia
Abstract
Education is a well-known driver of income and a causal factor for economic
prosperity and social development in modern society. It provides one with capital such
as qualification, knowledge and skillsets relevant to secure stable gainful employment,
as well as increase one’s income, improve health conditions and general welfare.
However, the measurement of the influence of education most often suffers from
endogeneity suspicion due to the possible presence of a correlation between the
education variable and the error term. This presents a critical issue when performing
a cause-and-effect relationship analysis as neglecting endogeneity can lead to
unreliable estimation results even when dealing with large samples because estimators
of the model parameters will be inconsistent. To date, most studies that focuses on
analysing the effect of education in Namibia have done so with other factors such as
fertility and not income, while most of these studies used regression approaches such
as the linear regression and logistic regression methods to perform their respective
analyses. However, no study has simultaneously tried to account for the endogeneity
of both education and income in Namibia. Thus, using the 2015/2016 Namibia
Household Income and Expenditure Survey as well as accounting for the possible
presence of endogeneity and for non-linear effects of continuous observed
confounders, this study aimed at estimating the impact of education on income in
Namibia, in addition to exploring different modelling strategies to capture the
relationship between income and education, and other socio-economic and socio demographic factors.
A total of 495,311 households containing 2,250,122 individuals aged 18 to 60 years
who have been to school and have earned salary and/or wage as their source of income
ii
in the last 12 months of the survey period were considered in this study. Three different
modelling strategies were carried out, namely: (i) Basic Ordinary Least Squares (OLS)
regression without considering the clustering, stratification and weighting factors, (ii)
Basic OLS regression considering the clustering, stratification and weighting factors,
and (iii) Instrumental Variables & Two Stage Least Squares (IV-2SLS) regression,
while the best fit modelling strategy to use for exploring the relationship between
income and education, and other socio-economic and socio-demographic factors was
determined using the Durbin and Wu-Hausman test of endogeneity.
Results from this study showed that majority (82.1%) of the households in Namibia
derived their source of income from salary and/or wage in 2015/2016. The IV-2SLS
was identified as the best modelling strategy to use since the Durbin and Wu-Hausman
test of endogeneity confirmed the presence of endogeneity (i.e, education must be
endogenous), thus, making the OLS strategies unreliable to use. Furthermore, factors
such as education, age, sex, marital status, type of work, employment period, total
hours worked and transport mode to work had positive and significant influences on
income, while factors such as region, dwelling unit type, main material for the wall,
household size, and no contribution to investment had a negative and significant
influences. However, the type of employer had a mixed effect on income. In addition,
the IVs estimators revealed that the average rate of return of schooling was 13% which
was higher compared to the OLS estimates of 5%.
It is therefore recommended that the Namibian government and policy makers
consider boosting more funding into education, especially in communities within the
rural and underdeveloped regions still having traditional dwelling households whose
structures are made of corrugated iron/zinc sticks, wooden poles, clay and/or cow dung. In addition, as part of their poverty alleviation strategies, the government should
iii
ensure the distribution of equitable resources, particularly the educational resources,
to enhance the development of rural and underdeveloped regions so that they too can
benefit from high-quality education opportunities in the country
Description
A thesis submitted in partial fulfilment of the requirements for the degree of master of science in applied statistics and demography
Keywords
Income, Education, Instrumental variables, Endogeneity, Ordinary least squares, Two stage least squares, Namibia